By Matthew Cranston and Greg Brown
Labor’s tax changes will give Australian companies incentives to pay out dividends rather than reinvest capital in their businesses and the economy, investors and corporate groups warn as they implore Jim Chalmers to dump his “needlessly and recklessly rushed” budget bill.
On the final day of submissions on the tax reform bill, fund managers joined business lobby groups in saying the Albanese government might end up kicking a “spectacular own-goal” and revealing the extent of “Treasury’s short-sightedness”, by rushing through the bill that gives the Treasurer power to change key areas retrospectively.
Labor is seeking to remove the 50 per cent capital gains tax discount in favour of an inflation-indexed discount, as well as introduce a minimum 30 per cent CGT, and a ban on negative gearing for new investors into existing property. Combined with the separate changes to trusts, the new tax rules will reap $88bn for the government over the decade.
The Australian Chamber of Commerce and Industry said the proposed increase in taxes would have a “sustained and significant impact on business investment” that would hit productivity growth. “It runs counter to the government’s stated priority to lift productivity,” the ACCI submission says.
“Extending the CGT changes to all asset classes shows a clear lack of understanding of the consequences for business investment. Removing the CGT discount for all asset classes fails to reward and incentivise productive, risk-taking investment in businesses … (and) are likely to materially influence the decision of an entrepreneur to establish a business or to invest in expanding and restructuring their business.
“While the government’s focus is on housing affordability and reducing the incentives for investors to purchase existing housing, business appears to be collateral damage in these changes.”
More banks published reports downgrading Australian house price forecasts this year pointing to higher interest rates but also the dampening effect of the government’s tax changes.
The Business Council of Australia said the process around the tax changes had been “needlessly and recklessly rushed”.
“It is particularly concerning that the process and time frame around the proposed changes in the Bill are manifestly inadequate on any reasonable measure,” the BCA said in its submission.
“The BCA urges the parliament to not proceed with the bill. The reforms will reduce investment, reduce productivity, reduce economic growth, and reduce housing supply …”
The latest investment figures show that without data-centre investment, non-mining private business investment would have gone backwards in Australia.
Last week the Greens and independent senator David Pocock said the high level of ministerial discretion in the Treasurer’s new tax bill was a concern and needed to be wound back to win their support for the bill. Senator Pocock said that although he had campaigned for and supported changes to the CGT as it related to residential property, he believed there had not been any “meaningful engagement with the community about changes to taxation on other asset classes”.
The BCA said the bill demonstrated “why the process of tax reform cannot be ad-hoc or piecemeal”.
“Tax reform should be holistic, and proposals must be carefully assessed on their merits and how they collectively contribute to a more effective tax system.”
Allan Gray Australia, which manages $12.1bn of clients’ investments, said the legislation was an example of policy “drafted in a vacuum” that appeared not to have contemplated many significant unintended consequences.
Portfolio manager Suhas Nayak and chief investment officer Simon Mawhinney wrote in their submission: “The recent changes to capital gains tax might turn out to be a spectacular own-goal which reveal the extent of Treasury’s short-sightedness. These CGT changes will reduce the incentives for all businesses to invest, growth and productivity will suffer and our global competitiveness will deteriorate.”
Their submission talks through scenarios in which investors are taxed higher on the growth stocks they invest in, encouraging them to invest in low growth high yielding stocks instead. “Under the new settings, there would be a huge incentive for companies, listed and unlisted, to pay out as much of their earnings in the form of franked dividends and to retain as few profits as possible for reinvestment,” they said.
“With a reduction in reinvestment, growth, productivity and employment will all suffer and with it the government’s fiscal take. Capital gains don’t just happen. Away from the razzle-dazzle of technology companies and the start-up world, ordinary businesses and their shareholders make capital gains by foregoing income today and reinvesting those profits. Reinvestment of those profits is what drives productivity and jobs.”
Treasury’s budget documents argue that the new indexation method would have delivered an effective CGT discount in the range of 35 to 60 per cent on average for typical assets held for five or 10 years. It uses just 4.4 per cent growth in stocks as the benchmark.
Westbridge Funds Management warned that the new CGT rules would hit higher growth assets, which were more likely to reinvest in capital.
The fund managers noted that the higher-growth value-add assets suffered about an 11 per cent decrease in total after-tax return compared with the current system, while the lower-risk, moderate-growth income asset sees an about a 6 per cent increase in total after tax return.
Westbridge chairman Damian Collins said: “This is a significant distortion. It encourages investors to favour assets where returns are delivered as income and inflation linked growth, rather than assets requiring capital investment, risk taking and active improvement.”
Westbridge also estimate that low-yielding, high-capital growth properties would be less sought-after because of the ban on negative gearing for new investors on existing stock.
Wilson Asset Management which manages $6bn on behalf of 130,000 investors said in its submission that it was OK with the changes to “unproductive” investments such as real estate speculation, but that applying all the new tax rules across every asset class was a mistake.
WAM chairman Geoff Wilson said in the fund manager’s eight page submission: “To be clear, Wilson Asset Management has no objection to the tax reform of unproductive assets such as housing. We object to the taxation of productive capital in a manner that discourages investment, entrepreneurship and economic growth. It will distort capital allocation, weaken incentives for productive- risk taking, increase uncertainty and raise the cost of capital across the economy.”
Mr Wilson noted that the changes should have had a proper review similar to the Ralph Review, which recommended the Howard government’s 50 per cent discount.
“The Ralph Review’s explicit conclusion, reached after the most exhaustive examination of Australian business taxation since CGT was introduced, made an explicit conclusion that a discount was superior to indexation alone.”
“The government has inverted that conclusion by reinstating indexation and abolishing the discount without engaging with the Review’s reasoning,” he said.
Maddocks Accounting firm said in its submission that it was “not a lobby group” and that the changes “Warrants serious attention by this Committee.”
“A fundamental restructuring of CGT with no independent review and a compressed implementation timeline falls well short of the standard of evidence based tax reform that the Australian community deserves.”
Maddocks noted that the government has not commissioned or cited any independent economic review to support the proposed changes.
“The Henry Review (2010), the most recent comprehensive examination of the Australian tax system, did not recommend this approach, it recommended only a modest reduction in the discount from 50 per cent to 40 per cent.”
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