The Henry Tax Review

Two years ago, the Australian government launched a study of the nation’s tax system with the intention of making it simpler.

The report was released yesterday, and the Federal government handpicked a few changes which it will seek to turn into law. Some of the main changes are outlined below

Resources super profits tax

Perhaps the biggest change in the review is a 40% resource rent tax, which would be levied on mining companies’ so-called super profits made from exploration of non-renewable resources.

Super profits in this case would be the profit attributable to a miner once it recouped exploration and capital investment costs, and shareholders received their dividends.

The government would reimburse the royalties the mining companies currently pay to state governments.

When combined with company taxes, the effective tax rate for major miners such as BHP would rise to around 58%.  Some analysts predicted the resource tax would result in a 14% cut in BHP’s FY13 earnings.

Such a big hit to potential earnings would make resource stocks more expensive on a valuation basis.

Indeed, mining stocks came under severe pressure today, with the sell off sparked by uncertainty over the extent to which profits will be impacted by the tax.

Increasing compulsory super contributions

The report suggested increasing the compulsory super contributions from the current 9%, to 12% by 2019.

This came as good news for Australia’s financial industry, as it means fund managers will receive increased fund flows from investors.

More investment opportunities would be created for super funds and asset managers, and this would presumably translate to greater fees for financial companies.

The initial reaction was positive for the financial sector, with shares in most of the major banks rising today despite the market’s fall.

Outside of the financial sector, however, the changes are generally seen as a negative as the added super will be worn by companies, big and small. Helping to offset this, the Treasurer did outline some good news for business (see below).

Reducing the company tax rate

The report’s other major recommendation was the lowering of the company tax rate from 30% to 28% from 2014.

The reduction in the company tax rate would be incorporated alongside the resources super profits tax, in a move designed to use the mining boom in order to provide a leg up for other industries.

Companies in industries outside mining would benefit from increased foreign direct investment, greater innovation, and entrepreneurship, and as a result would experience greater profits.

Conclusion

The changes the Henry report recommends are dramatic and could have a profound impact on Australia’s industries.

In particular, the major mining companies will have to contend with higher taxes that could make the sector less competitive internationally.

On the other hand, financial services companies stand to reap a major windfall from increased fund inflows related to the higher compulsory super contributions.

One thing is certain; the market will now experience greater uncertainty given that the changes proposed by the review will need parliamentary approval to become law.

Bookmark It