President Donald Trump in the United States, with the help of a Republican Senate, passed the largest sweeping corporate tax cuts in over 30 years. While exciting for the US, these tax cuts could have serious consequences for the Australian economy.
In fact, these tax cuts correspond to Australia’s recent debate over reducing company tax. The question now facing Australian lawmakers is, how will the US tax cuts affect our company tax laws and what action should we take now?
To understand our future better, let’s first look at the US tax cuts and how the US will benefit from them.
President Trump’s Recent Tax Cuts
On December 20, 2017, the US Senate passed the most drastic tax cuts in the US in over 30 years. The controversial tax bill reduced the corporate tax rate from 35 per cent to 21 per cent. As President Trump’s first legislative victory, it was highly celebrated.
According to the International Monetary Fund (IMF), the impact of the tax cuts should be a major factor in global growth, with a forecasted 3.9 per cent increase. The total cut is expected to reduce corporate tax payments by $USD1.5 trillion.
Critics and fans of the bill alike tout the biggest part of the bill as the reduction from 35 per cent to 21 per cent in the corporate tax rate.
The tax cuts also go beyond corporate taxes, as individuals who own small businesses are expected to enjoy a 20 per cent deduction they can claim on their business income. This also impacts how government taxes work for multinational corporations.
Other benefits for corporations under the new tax law include:
- Standard Deduction rates increase to 20 per cent for pass-through corporations
- Businesses can now deduct the cost of depreciable assets in a single tax year instead of amortizing them
- Allows companies to repatriate overseas foreign cash holding and pay a one-time tax of 15.5 per cent on their cash and roughly 8 per cent on their equipment. It is estimated that more than $2.6 trillion in corporate profits are sitting in foreign bank accounts.
Benefits of These Tax Cuts
One company who has already announced serious changes based on the tax overhaul is Apple. Apple Inc. has long been criticized for their offshore dealings and how much of their company work happens overseas. Following the tax overhaul, Apple announced they would be paying their one-time tax repatriate of $38 billion for their overseas cash holdings while increasing US spending contributions. The company has spent years investing and outsourcing manufacturing efforts to China, but now the tide is turning.
Apple also announced they would be investing another $30 billion in spending in the US in the coming years and hoped to add some 20,000 jobs to locations throughout its US campuses. Apple are set to build a new campus which would add up to some $10 billion in investments.
This dramatic investment is so far, the largest commitment by a company their size since the tax cuts were signed into law. Apple also announced it would pour some $350 billion into the US economy total, but much of that would include it’s federal tax payments.
While Apple is the first to announce changes to its company structure, it is far from the only company who has. AT&T also announced it would be giving 200,000 of their employees $1,000 bonuses in the US. Boeing announced it would be investing $300 million because of the tax law.
As we can see, some of the world’s largest companies are changing their attitude towards US investments. What does this mean for Australia? And how should we think about our company tax laws considering this radical change to US corporate taxes?
How Australia Stacks Up to The Rest of the World
It’s important to see where we are in Australia. Currently, our top income tax rate is 45 per cent for people who make $180,000 a year. Compare that with other countries such as New Zealand, who has an income tax rate of 33 per cent at its most, India at 35 per cent, Hong Kong at 15 per cent, Singapore at 22 per cent, and Russia at 13 per cent. Now, we are also competing with the US for corporate investment.
Australian Treasurer Scott Morrison is sounding the alarms too. He recognizes the dangers and risks Australia could face given this new relaxed tax law in the US. While investments in mining and energy aren’t likely to fade, what could fade are larger corporate offices and investments from US companies. His goal is to lower the company tax rate from its current 30 per cent to 25 per cent. The average OECD corporate tax rate is 22 per cent, which means that even if Scott Morrison has his was Australia would still only be in the middle of the pack.
Put simply, our current tax rates put Australia at risk because of the already competitive global market place. Lower company tax would make Australia a more attractive place to do business in. Since the US reforms will keep more US companies at home, and increase its attractiveness to global investors, this will reduce Australia’s opportunity to capitalize on those companies.
Unless we find a way to lower our company tax rate, other services like our NDIS and Medicare could possibly bear the brunt of the risk.
What Australia Must Do to Compete
If Australia hopes to compete with the United States on the level of other countries around the world, we must follow suit and lower our company tax. If we fail to introduce tax cuts to our economy, global corporations are not likely to find a reason to invest here. This, in the long term, can lead to increased unemployment and stagnant wage growth.
Scott Morrison agrees. He has sent out an 80-page booklet citing five economic speeches he has given to Australia’s chief executives to help make a change to a lower company tax. If we can do that, our ability to compete will dramatically increase.
Now is the time for action. Lower company tax rate will make Australia more competitive on the global market.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author
Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429.
The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.