Is Australia's tax rate harming business investment?

September 6, 2016

Australia’s current corporate taxation rate of 30 per cent is one of the highest in the OECD, raising concerns that it is harming business investment. These worries are reflected in the recent fall in non-mining business investment’s proportion of gross domestic product to its lowest point in some 50 years. For a country who stands out for its relatively high reliance on company tax income, this a concerning finding.

While the recent federal budget proposed a progressive reduction of the corporate tax rate—as well as the gap between the small business and general corporate tax rates— over the next decade, businesses are being forced to slash capital expenditure (capex) in the meantime. This is a particular issue for those over the ‘investment allowance’ threshold of $2 million in fiscal 2016, and an improved $10 million in fiscal 2017.

A taxing burden

The Tax Foundation found that the average corporate tax rate among OECD countries dropped from 28 per cent to 25 per cent over the past decade, and on present trends will be at 22 per cent in 2025, bringing it within range of Asia’s average of 23 per cent.

By comparison, Canberra’s latest proposals would see Australia’s rate drop to 27 per cent in that same period, and despite being a marked improvement from the current conditions, would still leave the country significantly behind its global and regional peers.

The Business Council of Australia has proposed an accelerated path towards conformity with OECD countries, with its corporate tax reform policy supporting a reduction to 25 per cent by 2020, and 22 per cent by 2025. With support from GST and income tax reform, this strategy should facilitate sizeable economic growth as Australia continues its transition towards a services-based economy.

Another factor in Australia’s half-century low in business investment is the limited scope of the ATO’s investment allowance, which currently allows small businesses to claim an immediate deduction on assets worth up to $20,000. The allowance is only available to companies with an annual turnover under $2 million in fiscal 2016, although since expanded to $10 million for fiscal 2017, at the end of which the scheme is currently scheduled to finish.

The initiative has been praised for its positive impact upon small businesses, however larger scale programs implemented in the United Kingdom showcased the scheme’s true potential. The British annual investment allowance policy covers businesses of all sizes, with a significantly larger asset threshold of £250,000 (A$436,000).

The UK’s peak business organisation, the Confederation of British Industry, praised the measures, holding them responsible for significant improvements in capex, particularly among mid-sized companies. A similarly scaled initiative may hold the key to reviving Australia’s ailing business investment landscape.

Capex cuts

Alleasing’s most recent quarterly Equipment Demand Index reported widespread, planned capex reductions across a range of industries and business sizes for the current fiscal year. Nearly 20 per cent of companies noted capex cuts, while the number of firms planning capex increases has decreased over the past 12 months from around 20 per cent to 16 per cent.

While understandably under pressure from a number of global economic and political uncertainties, CEOs and CFOs are indicating that more needed to be done to incentivise businesses to seek growth opportunities through capex. This is a widely held sentiment with more than a third of businesses agreeing the taxation system is having a detrimental impact upon the equipment acquisition decision-making process.

So common is the decision to delay crucial equipment upgrades and replacements until regulatory changes arrive, that a record high of more than two-thirds of Australian businesses are currently suffering the adverse impacts of relying upon outdated assets.

To reignite business investment and growth, the Australian Equipment Lessors Association’s tax white paper reform acknowledges the effectiveness of the existing investment allowance scheme in stimulating economic activity, but urges for the scheme to be “enhanced and streamlined.”

It is unlikely that businesses can maintain everyday operations while they wait for the current regulations to relax, particularly in capital-intensive industries where the early adoption of technological advancements is a major factor to competitiveness.

Companies in these industries are increasingly turning to alternatives to outright asset purchasing to remain competitive. Such alternatives include external providers of capital solutions who can assist companies with their asset financing needs. These alternatives continue to be the first choice of businesses until Australia implements a more globally competitive corporate taxation structure.

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