No rhythm in withdrawal tax method
The Federal Government’s doubling of withholding tax (WHT) is the wrong decision, based on the wrong advice, implemented at the wrong time.
It’s also a done deal politically.
There’s now little point in bemoaning the folly of trashing a world class regime that attracted billions of dollars of patient international equity to our shores. However, we should not condone the Federal Treasury’s sloppy analysis and witless approach to the realities of global capital markets.
The immediate priority is to shape legislation that will codify Australia’s new two-track withholding tax regime. We can then quickly reboot efforts to restore a single, low-rate internationally competitive WHT for all assets in managed investment trusts (MITs).
The Government’s deal with The Greens sets a default withholding tax rate of 15 percent. New legislation, to be introduced in the spring session of Parliament, will offer a lower 10 percent rate to some types of new buildings that meet tough green hurdles. This carve out applies only to offices, retail facilities and “non residential accommodation” in managed investment trusts.
There’s also a spiteful last minute twist inserted into the deal by Treasury – the lower 10 percent rate won’t apply unless every single building in a managed trust meets the Government’s green hurdles. These hurdles are 5 star Green Star or 5.5 star NABERS, or their equivalent.
Consultation on the new legislation has commenced.
The Property Council’s priorities are:
Persuade the Federal Government to state publicly and unequivocally that it will not increase withholding tax rates (again) in the future.
Convince the Government to scrap its requirement to quarantine all 10 percent WHT rate assets. Australia’s tried and tested tracing provisions can be used to ensure the integrity of the new regime.
Make the case for extending the lower withholding tax rate to existing and retrofitted buildings.
Extend access to the lower 10 percent rate to all building types and infrastructure in MITs.
Agree on common sense rules about green performance benchmarks and issues such as the definition of a “post 1 July construction commencement date”.
It makes sense to apply the 10 percent rate to assets completed after 1 July 2012.
In addition, there is much to be done to ensure flaws in the NABERS energy rating system for hotels and shopping centres are remedied urgently. This task is well underway.
There are lessons to be learned from the withholding tax ambush.
The Labor Government doubled withholding tax to help balance the budget. Sadly, it was willing to vandalise a successful policy in order to make a brand statement about its “economic competence”.
Having announced the higher tax on Budget night, it would not listen to reason or consider the persuasive evidence presented to it. The Government knows budget measures always get passed.
Even the mining tax got up eventually – and the miners are paying an effective rate of 22.5 percent.
To its great credit, the Coalition opposed the WHT hike. However, with the independents unwilling to reject a revenue measure, The Greens were left in the negotiating seat.
The Property Council held many discussions with The Greens urging them to reject a tax increase based on defective Treasury advice. The Greens were generous with their time (in the middle of the asylum seeker debate) and listened to our case. However, they decided to strike a deal that provided a lower WHT rate for a limited set of green buildings.
The Greens would not expend further political capital to extend the 10 percent rate to existing green buildings, green refurbishments, green infrastructure or green bioscience facilities, green affordable housing, cancer clinics, child care, retirement or aged care amenities, to name a few.
Too many eggs were cracked to scramble this runtish omelette.
The most telling lesson from the WHT debacle is the misdirected power and incompetence of the Federal Treasury.
Treasury said a 15 percent WHT is globally competitive – its inept analysis was palpably amateurish and erroneous. We proved this, but they didn’t care.
Treasury said the higher WHT rate will raise $260 million over four years – the Allen Consulting Group (ACG) said this was bunkum. Treasury bagged ACG but refused, despite the Minister’s promises, to release its analysis. We’ll obtain its analytic farrago using Freedom of Information laws.
Treasury said a higher WHT aligns with the Henry report – in fact, Henry explicitly makes the case in favour of an internationally competitive WHT regime.
Why Treasury would want to impair Australia’s capacity to attract much-needed patient equity capital that reduces our national reliance on foreign debt should unsettle all policy makers.