The Federal Labor Government’s doubling of withholding tax is the wrong decision, based on the wrong advice, implemented at the wrong time, according to the Property Council of Australia.
“The 7.5% withholding tax rate, introduced in 2008, successfully attracted patient international capital that was invested in high quality green assets and community facilities”, says Property Council CEO, Peter Verwer.
“The decision to double the withholding tax rate to 15% sends a negative signal to investors who will now actively seek stronger after-tax returns in other countries”.
Under a deal negotiated with the Greens, Australia will now operate a two-tier withholding tax system that replaces a simple, elegant scheme with a highly complex arrangement.
New assets within managed investment trust (MIT) arrangements that are constructed after 1 July 2012 will be subject to a 10% withholding tax rate if they meet strict environmental performance hurdles.
All other assets, including existing green assets, will be subject to a 15% withholding tax rate.
“The Federal Government has trashed its much vaunted policy to champion Australia as a regional financial centre,” Mr Verwer says.
“A 15% withholding tax rate is not competitive, despite repeated claims by the Government which it refuses to substantiate.”
“All the evidence shows that virtually all countries offer pension funds an effective withholding tax rate of 10% or below; in fact, many apply a zero rate under tax treaty arrangements.”
“By doubling the rate to 15%, the Government has hobbled Australia’s capacity to attract patient global capital.”
“In addition, a 15% rate is higher than the tax applied to debt structured finance, which means the Government favours debt over equity.”
“This is the wrong time to increase Australia’s reliance on debt, given increasingly volatile global financial markets.”
“The higher withholding tax also contradicts the Henry Review recommendations”. [See break out box below]
The Property Council has been particularly critical of the advice provided to the Government by Treasury.
“It is time Parliament held the Federal Treasury to account on this issue,” Mr Verwer says.
“Treasury has consistently refused to reveal any of its assumptions or modelling. It has criticised the evidence-based analysis of the Allen Consulting Group, while refusing to release its critique for public examination.”
“In addition, the only published Government material to analyse withholding tax rates across countries was embarrassingly flawed and omitted several countries with low rates.”
“Treasury’s sloppy advice to the Government has weakened our national competitiveness and should be scrutinised to ensure further policy blunders do not occur.”
The Government has announced a process to consult on legislation to ‘support investment in the construction of energy efficient buildings’.
“It is critical that these consultations draw on the first class work done to help shape the now abandoned green tax breaks program,” Mr Verwer says.
“It is also important that any new scheme recognises practical issues associated with the construction and ownership of MIT assets.”
“The lower withholding rate should also extend to a wider range of asset types than currently proposed, including infrastructure, residential property, industrial, health and education facilities, retirement and aged care premises as well as tourism assets.”
“The doubling of withholding tax represents a massive own goal for a Government that claims to understand capital markets.”
“If the Government were truly committed to transforming Australia into a funds management hub it would have voted with the Coalition to review the impact of its legislation on the broader Australian economy.”
“The Property Council thanks the Coalition for recognising the importance of a low rate to Australia’s competiveness and international reputation.”
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