A key rationale for the Turnbull Government’s company tax cut package was to boost foreign investment in Australia and, therefore, ‘jobs and growth’.
It was argued by the Government and its supporters that Australia’s company tax rate was uncompetitive globally, therefore, if the company tax rate was not cut to 25% from 30% then Australia would lose investment to other lower taxing jurisdictions, thereby crippling the nation economically.
With this background in mind, it is interesting that Treasurer Scott Morrison is seeking to increase taxes on foreign investors that receive income via the use of stapled securities, as well as those that use managed trusts. From The AFR:
Under changes announced by Mr Morrison last week, foreign investors deriving income using so-called stapled structures will be required to pay tax at 30 per cent, not 15 per cent as is the case at present.
The federal government says it is closing a loophole that gives foreigners an unfair advantage over domestic investors.
“The use of staples and similar structures has grown significantly in recent years and expanded into new sectors, beyond their traditional use in commercial and retail property,” Mr Morrison said.
“Hundreds of millions in revenue is potentially being forgone because of staples and broader tax concessions. Left as is this could grow to be in the order of billions of dollars”…
EY tax partner Richard Lambkin said the changes were “bad news” for future asset privatisation programs because foreign investors often provided low-cost capital for such ventures.
“If you increase the tax on this investment … that increased cost will flow through to both state governments and consumers,” he said…
King & Wood Mallesons Sydney partner Scott Heezen agreed the effect of the changes was to make Australia less attractive to foreign investors.
“What it does is effectively increase the tax rate to 30 per cent for foreign residents when they were previously subject to 15 per cent tax,” he said.
“We are competing for capital and this is certainly one thing that will be a significant consideration going forward for investors.”
Gilbert + Tobin partner Muhunthan Kanagaratnam described the government’s approach as “xenophobic” and said the changes went well beyond stapled structures to affect foreign investors in all MITs.
While I have no issue per se with the above reforms, they do reek of hypocrisy. At the same time as Scott Morrison has argued for lower company taxes to boost foreign investment, he is seeking to raise taxes on foreign investors, thereby reducing foreign investment.
This is yet another example of why Australia needs comprehensive, broad-based tax reform like the one laid-out in the Henry Tax Review, not the piecemeal (often contradictory) measures sought by the Turnbull Government.
