A key property industry association has blasted moves by the government to increase withholding tax, saying that the new tax rate will compromise Australia’s competitiveness as an investment destination and affect the nation’s ability to attract overseas funding for property investment and construction projects.
Property Council of Australia chief executive officer Peter Verwer says an effective doubling of the withholding tax rate is the wrong decision, based on the wrong advice, implemented at the wrong time.
“The decision to double the withholding tax rate to 15 per cent sends a negative signal to investors who will now actively seek stronger after-tax returns in other countries,” Verwer says.
Under a new deal negotiated with the Greens, new Australian assets held by overseas investors within managed investment trust (MIT) arrangements that are constructed after July 1, 2012 will be subject to a 10 per cent withholding tax rate if they meet strict environmental performance hurdles.
All other assets held by foreign investors, including existing green assets, will be subject to a 15 per cent withholding tax rate.
Compared with current withholding tax rates of 7.5 per cent, this effectively means a doubling of the rate for those assets which do not meet the environmental performance hurdles.
Verwer says virtually all evidence shows companies offer overseas pension funds an effective withholding tax rate of 10 per cent or below, and that a rate of 15 per cent will compromise Australia’s ability to attract ‘patient’ global capital.
In addition, the 15 per cent rate will be higher than the tax applied to debt structured finance, which will mean the government will be favouring debt over equity, Verwer says.
The Property Council has also blasted the advice provided to the government by Treasury, saying Treasury has consistently refused to reveal any of its assumptions or modelling and that the only 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,” Verwer says. “It is time Parliament held the Federal Treasury to account on this issue.”
The Council welcomed a government announcement of a process to consult on legislation to support investment in the construction of energy efficient buildings.
Verwer says these consultations should draw on the work done to help shape the now-abandoned green tax breaks program and that it is important that any new scheme recognise 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,” Verwer says.
Still, he notes, the doubling of withholding tax represents a ‘massive own goal’ for the Government in terms of its goal to champion Australia as a regional financial centre.
“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,” Verwer says.