Treasury’s doubling of withholding tax ‘flawed and economically harmful’: Property Council

The Property Council of Australia (PCA) has slammed the decision of a House of Representatives Economics Committee backing the doubling of the withholding tax charged for foreign investors who invest in Australian managed investment schemes. 

Many of these managed funds are used to fund big property and infrastructure projects. The new tax rate of 15% (up from the current 7.5% rate) is due to kick in on July 1. 

Government members on the committee backed the raising of the tax rate, while Coalition members backed a position held by the PCA that the tax should be scrapped because it discourages foreign investment. 

The tax hike has also been slammed by property developer Lend Lease and the Financial Services Council, which represents fund managers and superannuation funds. 

“The evidence provided by industry shows that Treasury’s reasoning is inadequate, flawed and economically harmful,” says Property Council chief executive Peter Verwer. 

“It is particularly galling that government members endorsed Treasury’s position despite Treasury’s repeated refusal to reveal its modelling on the impacts of a higher tax on the economy.” 

“Treasury didn’t even bother to assess the impact of a higher withholding tax on the federal government’s own revenue streams.”

His comments come soon after a Malaysian investment trust payed $415 million for a portfolio of three five-star Marriott hotels, with the deal going ahead despite the prospect of the higher withholding tax rate “causing some friction”, according to Mark Durran and Craig Collins of Jones Lang LaSalle Hotels, who negotiated the deal. 

Verwer says Treasury’s analysis of the tax hike is flawed on three counts. 

“First, Treasury says that international investors are more interested in Australia’s AAA credit rating than tax rates.” 

“Treasury doesn’t understand that investors actively compare tax rates in different countries to assess the relative impact on their investment returns.” 

“It should be obvious that after-tax returns are critical to investor decision-making,” he says. 

Secondly, Verwer says that Treasury “ignores any difference between the headline withholding rate promoted by a country and the effective rate – the rate actually imposed on investors.” 

“Treasury has not done its homework and has been conned into believing that other countries apply a 15% rate.” 

“In fact, most countries charge pension funds withholding tax of 5% or less, many charge zero.” 

“Other countries are determined to attract the patient equity capital of large pension funds, particularly when debt markets are increasingly unstable.”

“By doubling our withholding tax rate, Australia reduces its ability to compete with the lower effective rates of other countries.”

Lastly, Verwer says: “Treasury has failed to realise that a higher withholding tax will scare off international investors, which will reduce both economic activity and government revenue flows.”

“You can’t tax investment that doesn’t occur.” 

Verwer pointed to a recently released Allen Consulting Group report modelling the impact of the proposed withholding tax increase on tax takings and the broader economy. 

The report, commissioned by the PCA, shows that by 2015-16, instead of collecting $75 million, state and federal governments will only receive $36 million and GDP will shrink by $30 million. 

Both the Property Council and Financial Services Council say they have evidence that more than a $1 billion of global funds have already been directed to other countries or frozen, following the 2012 federal budget announcement.

In its defence, the government claims the new tax rate is a better balance of the needs of Australia to remain an attractive destination for foreign investors while ensuring a fair return.

Treasury is estimating a tax return of $260 million over four years generated from the withholding tax.