Australia’s biggest business groups have accused the federal government of creating an increasingly unpredictable tax system that risks driving away investment, escalating the backlash over the government’s sweeping capital gains tax overhaul in the budget.
In a broad intervention, peak industry groups representing major employers, small business, tax specialists, the resources sector and the legal profession, used a submission to the Board of Taxation to warn against what they described as a growing pattern of tax changes that prioritised revenue over stability and confidence.
Prime Minister Anthony Albanese has been resolute against criticism of his budget changes to capital gains tax, negative gearing and trusts, arguing it will redirect investment away from existing housing and into more productive parts of the economy.
Confident it will have the support of the Greens in the Senate, Treasurer Jim Chalmers will introduce the first tranche of budget legislation to the House of Representatives as early as this week, while consulting the start-up industry about potential carve-outs.
In a joint submission to a Red Tape Reduction Review, the Australian Chamber of Commerce and Industry, Business Council of Australia, Corporate Tax Association, Council of Small Business Organisations Australia, Law Council of Australia and Minerals Council argued businesses were increasingly concerned about retrospective change and uncertainty in the tax system.
“Of equal concern is what we regard as a troubling pattern of ‘policy clarification’, which in practice reflects a willingness to pursue revenue outcomes without adequate regard for systemic coherence and tax principles,” the letter states.
“Changing tax laws retrospectively without notice and for no reason other than an undisclosed revenue risk not only offends core rule of law principles, but it also sends deeply damaging signals to all taxpayers regarding the certainty of their tax positions and the stability of our tax system.
“It particularly discourages global capital from investing in Australia.”
They pointed to reputational damage, reduced investor confidence, legal and advisory expenses, restructuring costs, management time diverted into tax compliance and higher administrative burdens for regulators.
Cabinet secretary Andrew Charlton acknowledged growing concerns from start-up businesses and investors with low-cost bases over the proposed capital gains tax changes on Sunday.
“The point that many small businesses have been making is valid,” Charlton said. “Because that new regime doesn’t interact well if you have a really low capital base, because you’ve got nothing to inflate off, so there are real concerns out there.”
Charlton said Treasurer Jim Chalmers had recognised those concerns before the budget and consultations were under way. But he defended the broader reform, arguing it tackled a longstanding distortion in the economy.
“This budget addresses a big problem in the Australian economy, and that problem is that we have a huge amount of investment going into real estate existing property,” he said. “That investment is pushing up prices, it’s pushing out new home buyers, and it’s starving other productive parts of the economy of investment, and our tax system was making that problem worse.”
He argued replacing the 50 per cent capital gains tax discount with inflation indexation would better target investment incentives.
“The old CGT regime of a 50 per cent discount provided a very blunt instrument, which massively overcompensated some assets and taxed way too harshly other assets.”
But some critics dispute that claim, with analysis by UNSW Business School Scientia Professor of Economics Richard Holden arguing the changes could unintentionally penalise faster-growing businesses.
His modelling suggests two otherwise identical firms – starting with the same investment, revenues and staffing levels – can end up paying markedly different effective tax rates depending on how quickly they grow.
Under Holden’s example, a business expanding well above inflation and creating additional jobs would ultimately face a substantially larger capital gains tax bill than a slower-growing rival sold on the same earnings multiple.
Holden has described the effect as a “productivity tax” – warning the reforms risk discouraging the kinds of firms governments typically want to encourage.
The government has privately dismissed his critique as selective and said the analysis made assumptions that do not reflect the vast majority of small businesses, which are eligible for existing small business concessions.
It also says it has consulted on foreign resident CGT policy and is considering outcomes.
Opposition housing spokesman Andrew Bragg said the capital gains tax discount should be increased, not cut.
“I would increase it,” Bragg told Sky News Australia, when asked about the capital gains tax discount. “I wouldn’t reduce it. I would be looking to cut taxes. We should be looking to cut taxes.”
When asked how the Coalition would also fund income tax cuts, Bragg said the solution was to “cut the hell out of spending”.
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Rob Harris is the national correspondent for The Sydney Morning Herald and The Age based in Canberra. He is a former Europe correspondent.Connect via email.