Tax Review to Lure Investment

The Australian IT and telecom (IT&T) industry could experience an investment renaissance under a new capital gains tax (CGT) regime expected to be introduced following the government's review of the business tax system, known as the Ralph Report.

In the lead-up to the report's release, industry analysts welcomed the recommendations, which are expected to urge the government to slash the CGT rate from the current 36 percent for corporations and 47 percent for individuals to as low as 15 percent.

According to Allan Aaron, executive director of Sydney-based investment firm Technology Venture Partners (TVP), the long-overdue reform will encourage international investors to choose Australia over other investment destinations that are currently wooing billions of dollars away from our shores.

"A lot of companies from the U.S. who considered investing with us decided not to in the end because they were facing capital gains tax. From a business investment perspective, it is important to remember that money flows these days are global," Aaron said.

"Someone investing in Australian business from Malaysia or the U.S. would be paying twice as much tax on their capital gains as they would if they were investing in a company in Singapore. That further means that Australia would have to be a far better marketplace than the U.S., for example, for the investor to make the same after-tax profit and that is clearly not possible," he said.

"Obviously, we're losing out on foreign investment as a consequence," Aaron added.

Some analysts estimate that up to A$2 billion (US$1.3 billion [B]) is lost to Australian business as a result of having a tax system more suited to an income-oriented, rather than a growth-oriented economy. In addition to impeding international investment, Aaron believes small business growth and investment are both affected by the current CGT regime.

"This system reduces the number of eligible people who would want to start a small business, and bear in mind that small businesses account for around 70 percent of new employment," he said.

Under the proposed system, capital gains on investments would be taxed at a lower rate, allowing taxpayers to elect the system of taxing assets under the "mark-to-market" program. However, most assets, including shares, would continue to be taxed on the current realization bases, which could continue to impede the growth of small business by merger or through share-swapping options.

But according to Aaron, any changes to the current business tax system would be welcomed by the IT&T industry hungry for investment.

"We have suffered under this tax regime for many years and in information technology, several years is a lifetime," Aaron said. "It really requires some decisiveness and vision from the Government. If we remain uncompetitive in this sense for the next 10 years, the game may well just pass us by."

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