“Particularly when the company tax debate has gone nowhere, it would be great to see something like this have bipartisan support.”
Annual business investment as a share of Australia’s economy is languishing near a 25-year low, partly due to the wind-down of the mining investment boom, according to Reserve Bank of Australia data.
Grant Wardell-Johnson, KPMG Economics & Tax Centre lead tax partner, said Labor’s 20 per cent upfront deduction for business investment was “better than nothing”.
“We’d like to see company tax rate reductions but if you’re going to do something accelerated depreciation does lower the effective tax rate,” he said. “It would help a bit to joint ventures or consortia in resources, mining or even other projects.”
Under Labor’s so-called Australian Investment Guarantee unveiled last March, all Australian businesses would be able to immediately deduct 20 per cent of investment in eligible depreciable assets over $20,000, with the balance depreciated in line with normal depreciation schedules from the first year from July 2021 onwards.
Assets such as tangible machinery, plant and equipment (for example, trucks and utes, but not buildings) and intangible investments such as patents and copyrights would be eligible for the immediate deduction, according to Labor’s policy document.
Businesses in industries with large-scale investments with long depreciation time frames over several decades would receive the largest cash flow boost. Many power, oil and gas and mining projects are depreciated for tax and accounting purposes for 20 to 30 years.
Sshadow treasurer Chris Bowen has said the permanent and targeted tax support is a pro-growth, pro-jobs reform that rewards businesses making new investments in Australia, rather than delivering a windfall tax gain to companies for previous investments viable at the 30 per cent rate.
The independent Parliamentary Budget Office estimated Labor’s policy would cost $3.4 billion over the four-year budget period and $10.3 billion over a decade.
Labor is funding the business tax breaks from curtailing the generosity of negative gearing, the capital gains tax discount, cash refunds of franking credits and trusts typically used by wealthy families and private businesses.
Since the corporate tax cuts for larger companies were blocked by Labor and crossbench senators last year, the Coalition has focused on small business tax cuts, cutting red tape and boosting the cash flow of small firms through policies such as a small business funding vehicle.
Labor backflipped on small business tax breaks and matched the government’s commitment to accelerate by five years a cut in the corporate tax rate for small firms to 25 per cent by 2021-22.
To help pay for that, Labor’s instant asset tax write off was deferred by 12 months to commence in 2021-22 and be available permanently thereafter.
Net capital expenditure in the food, beverage and grocery sector, which directly employs about 324,450 people, slumped to its second-lowest level in the past 11 years, according to its state of the industry report published in November.
Economic modelling for the Australian Food and Grocery Council in 2014 found a 30 per cent investment allowance for a temporary three years (Labor’s policy is for 20 per cent upfront deduction available permanently), would boost sector investment by 4-8 per cent or over $500 million each year and deliver up to an extra 1475 jobs.
The Business Council of Australia’s top corporate tax priority remains for the 30 per cent corporate tax rate to be cut to lift investment, productivity and wages.
But BCA chief executive Jennifer Westacott signalled subtle support for other tax policies such as an investment allowance in an opinion column published in The Australian Financial Review this month.
“If we are incapable of lowering the company tax rate for all companies, let’s do something meaningful on investment or depreciation allowances,” she noted.
Asked if the Coalition would match Labor, Treasurer Josh Frydenberg said: “Labor have a habit of saying one thing and doing another when it comes to supporting business. Who could forget Bill Shorten and Labor voting against company tax cuts in this Parliament.”
Victoria University Centre of Policy Studies senior research fellow Janine Dixon said a targeted investment subsidy was more effective at lifting investment than a corporate tax rate cut, because the latter was too costly to the government’s budget and delivered an unnecessary windfall gain to all existing investments including by a large base of foreign investors.
“An across-the-board corporate tax cut gives away too much money, whereas an investment allowance encourages investment, boosts jobs and wages without a big cost to the budget and national income,” she said.
Dr Dixon said Labor’s policy was a “small step” towards a full corporate cash flow tax being promoted by Labor-aligned economists Ross Garnaut and Craig Emerson.
In the United States, some economists believe Donald Trump’s immediate full expensing for tax purposes of capital investment incurred before 2023 has been a bigger driver of lifting business investment than the slashing of the corporate rate to 21 per cent, from 35 per cent.
Lateral Economics chief executive Nicholas Gruen said investment was “sticky” and hard to influence, but investment allowances and accelerated depreciation could help lift investment a bit without squandering a company tax cut on oligopolies such as the banks.
“An alternative might be to give accelerated depreciation incentives for R&D or investment above businesses three-year baseline average, to minimise the cost and reward faster-growth businesses,” Dr Gruen said.
KPMG’s Mr Wardell-Johnson said projects modelled on cash-flow economics would benefit most from Labor’s faster asset write-off, particularly in energy, natural gas and possibly mining.
Many of those projects write their assets off over 20 years, with accelerated deductions upfront already.
Typical company investment such as by stand-alone supermarkets, modelled on corporate economics, would benefit less, because the instant asset write off would merely change the timing of tax payments, not the overall tax paid, he added.
These wholly incorporated entities would book the asset write-off as a deferred tax liability, but it would not alter the overall tax charged line in company accounts.