So the federal govt here in Australia must have panicked. Knowing everyone hates every govt, independently of whether they voted for or against, this lot have decided that, since they have an accidental majority, they may as well do something other than line their own pockets. Why? The mind boggles…
Case in point – they recently released the upcoming federal budget. Assuming they can bludgeon it through parliament, here is the forecast impact:
Capital Gains and Negative Gearing on property investments – negative gearing will be limited to newly built homes, while the current 50% Capital Gains Tax (CGT) discount will be replaced by an inflation-adjusted cost base and a 30% minimum tax. There are exemptions – such as negative gearing on new properties and CGT on the primary residence.
At one level this is designed to impact the supply and demand curve for residential properties so those younger generations currently locked out of the property market have a chance. This works by investors realising that residential property will be a shit investment with yield less than 2%, completely illiquid and now highly taxed.
Even though these tax changes are grandfathered, the changes have spooked the market and there are more properties being sold now than are being bought; the result is that prices start dropping. That is only because people want to sell before the prices drop – its a self fulfilling prophecy. Anyway as prices drop all investors will need to get out of residential investments because these investments only make sense when the asset value appreciates (like it has for the last 40 years). So, yes, this policy will work; and it is very clever because it creates the required outcome by exploiting the demented cuttlefish psychology that caused the problem in the first place.
A second change is to R&D tax. Two subtle changes here. First, the minimum annual R&D spend required to make a claim has increased to $50k. This immediately removes 50% of all claims, mostly spurious, from small to medium sized companies. Second, expenditure on supporting R&D activities will no longer be eligible for the incentive. This means you will only be able to claim for core activities that meet the OECD Frascati Manual (i.e. true blue sky R&D, science based, testing a hypothesis, proper risk, etc).
What many companies previously did was synthesise (at a small cost) some bullshit core activity that allowed them to claim the supporting activities, which were what they were really doing: software development, engineering iteration, product trials, integration work, testing, debugging, documentation, customer-specific adaptation and all the other unglamorous work required to get a real product into the world.
I for one wouldn’t claim for a synthesised core activity if it was 100% of my claim for two reasons. One, if audited, my claim would be 100% exposed to penalties with interest. Second, I don’t want to do blue sky research because (as everyone should know) this was made obsolete in the 1980s when corporate America realised that their corporate R&D, statistically speaking, had a negative return (after which they relied on business unit R&D and buying successful startups). Essentially new products based on risky science had hit that part of the Pareto Rule that makes it bad, bad, bad (i.e. all the easier hits had been already been hit).
So the core effect of this and other changes to the R&D tax is that they have killed this stupid program. Our economy doesn’t need R&D, so why encourage it? Even if you did, why encourage R&D that has a negative IRR? It was always a very expensive marketing program without any product to sell, or any interested customers. Very government….
All the tax changes noted above also have the intended consequence of making the startup environment less attractive. Higher CGT on profits with no capital base. No R&D tax support. More capital needed. Even lower IRR for investors, although its hard to beat zero capital returns. The consequence will be that capital will stop being allocated to underscale and speculative Australian VC funds.
If the economy does not need more R&D, why subsidise it? If the R&D being subsidised has a negative internal rate of return, why encourage it?
But here is the rub: they are trying to kill the housing machine and the R&D scheme at the same time.
That matters because housing is not just an asset class in Australia. It is the main domestic economic engine. It sucks in foreign capital attracted to our stable poltical environment, props up the whole service sector – household balance sheets, state stamp duty, construction activity, bank lending, political stability and the national delusion that wealth can be created by bidding up the same pile of bricks between increasingly indebted generations.
It is a stupid machine, but it is our machine. If the government wants to weaken that machine, fine. It probably should. But then it needs another engine. And this lot haven’t got a clue. Not one.