Tasmanian Liberal senator joins chorus against doubling of foreign investor tax – but keeps quiet on Howard-era 30% tax rate

Tasmanian Liberal Senator David Bushby has joined the chorus of voices opposed to the government doubling the withholding tax rate to 15%.

The tax is charged on income foreign investors earn when they invest in Australian managed investments schemes, many of which fund large property and infrastructure projects.

Since the increase was announced in the budget, the Property Council of Australia, Lend Lease and the Financial Services Council have all slammed the decision, saying it will scare off foreign investors, but they have failed to sway Federal Treasurer Wayne Swan.

“The government’s policy reversal on a tax critical to foreign capital inflows sends the wrong signals,” wrote Bushby in a letter published in the Australian Financial Review today.

“Investment banks will reassess investments in listed property and other assets, and advise their clients of lower than expected future returns from Australia.

“For Australian investors who hold wealth and retirement assets in listed property and infrastructure assets, the withdrawal of foreign capital will only add downward pressure on share prices – and cause retirees even more grief,” he wrote.

Bushby accused the federal government of raising the tax without public reviews or industry consultation.

However, he failed to mention that under John Howard’s Coalition government the withholding tax rate stood at 30%.

It was cut to 7.5% by the Rudd government in July 2010.

The federal government has played down suggestions that the latest tax hike will scare off foreign investors.

Tony McDonald, general manager of Treasury’s international tax and treaties division, told a government committee there would be no “flight of capital” though he acknowledged that some transactions would not take place due to the higher tax rate.

He also said the impact of the tax hike on the economy would be “fairly minimal”.

McDonald made his remarks while giving evidence to the House of Representative Standing Committee on Economics earlier this week as it met to consider the withholding tax increase (as contained in the Income Tax Amendment Bill) and other new pieces of legislation.

According to Treasury estimates, the tax increase will bring in additional revenue of $260 million over the next four years.

Also giving evidence, Martin Codina, director of the Financial Services Council, claimed lost investment would be much higher than the increased tax revenue.

He claimed as much as $1 billion in investment had already been lost while goodwill generated by the low tax rate would also be lost.