5 days ago
Super warning for everyday Aussies over new 'cashflow tax': 'Less desirable'
The big idea for Australia right now is a whole new tax. One different to any we've seen before, and one with potentially big impact for normal people, their investments and their superannuation.
But what is the so-called 'cashflow tax'? Who will get whacked by it? Which businesses will thrive and which will suffer?
If it comes in, should you change how you invest or where you keep your money?
The idea comes from the Productivity Commission.
The Treasurer asked them for ideas to fix the economy and this is one of their big ones.
It came out in a report released last week and has been like a grenade rolled into our national tax debate.
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What is the 'cash flow tax'?
One thing the Productivity Commission is arguing for is cutting the company tax, which, ho-hum, that is an idea as old as the Sydney Harbour Bridge.
The explosive new idea is to make up for any lost revenue with this cashflow tax.
The big difference for firms is that they would get to deduct capital expenditure straight away from the money they pay tax on.
Currently, a company would make $100 million in profit, pay 30 per cent or $30 million in tax and then spend $20 million on a new warehouse.
Under the new proposal, a company would make $100 million, pay $20 million for the new warehouse, and pay the 5 per cent cashflow tax on the remaining $80 million.
It's a tax cut that is supposed to make companies invest more, which should, in theory, raise our national wealth and living standards.
Is the cashflow tax dead in the water - like most tax reforms?
Surprisingly … no.
Not totally dead.
This cashflow tax has a chance of becoming real.
Partly because it's not a terrible idea, and partly because it is bundled with the company tax cut from 30 per cent to 20 per cent.
Companies pay taxes on their profits, so the company tax cut means they get to keep more of those profits.
'Rather than deducting the cost of capital over time through depreciation, companies can deduct their capital costs immediately when calculating their net cashflow tax liability," the Productivity Commission said in its report.
"That makes their capital cheaper and their propensity to invest greater."
The company tax cut acts as a carrot, but for big companies the carrot would be a mirage.
There is an asterisk in the Productivity Commission's plan – the tax cut would only apply to companies with under a billion dollars in revenue.
So the most powerful companies in Australia would miss out.
Wesfarmers has over $40 billion in revenue, JB Hi-Fi makes $9 billion.
Even a smallish firm like Myer makes $3 billion in sales.
One possibility is that big conglomerates could divest business arms that have under a billion in revenue.
Myer could spin off its clothing brands (David Lawrence, sass & bide, etc) into a separate business, for example.
There's a possible implication here for everyday people and their money.
If the tax change became law, index investing in Australia could become less desirable.
Index investing is a passive strategy of owning a group of companies, most often the top 200 listed firms ('the index').
Super is often invested in the index.
But those are the exact firms that don't get the tax cut, in fact they get only a tax hike (the cashflow tax would apply to them).
Smaller firms – the kind that are not in the ASX200 - would be the ones who get a boost.
