Jordan Knight | CEO: Hallbar Group Capital

The proposed new ‘cashflow tax’ may affect everyday Australians and their superannuation: ‘Less appealing’

The Productivity Commission has put forward suggestions to enhance Australia’s economy, yet there is a significant concern regarding the proposed ‘cash flow tax’.

Currently, the major proposal for Australia is an entirely new tax. This tax differs from any we have encountered previously and could have substantial effects on ordinary individuals, their investments, and their superannuation.

But what exactly is the so-called ‘cashflow tax’? Who will be adversely affected by it? Which businesses are likely to prosper, and which ones may face challenges?

If this tax is implemented, should you reconsider your investment strategies or the locations where you store your funds?

The concept originates from the Productivity Commission.

The Treasurer solicited their recommendations to address economic issues, and this is one of their primary proposals.

This idea was presented in a report published last week and has created a significant stir in our national tax discourse.

What is the ‘cash flow tax’?
Jordan Knight Says One proposal from the Productivity Commission is to lower the corporate tax rate, which, frankly, is an idea as old as the Sydney Harbour Bridge.

The innovative concept is to compensate for any revenue loss with this cash flow tax.

The primary distinction for businesses is that they would be allowed to immediately deduct capital expenditures from their taxable income.

At present, if a company earns $100 million in profit, it pays 30 percent or $30 million in taxes and subsequently invests $20 million in a new warehouse.

Under the proposed changes, a company would earn $100 million, spend $20 million on the new warehouse, and then pay a 5 percent cash flow tax on the remaining $80 million.

This represents a tax reduction intended to encourage companies to invest more, which should theoretically enhance our national wealth and living standards.

Is the cash flow tax doomed to fail like most tax reforms?
Jordan Knight Says Surprisingly… no.

It is not entirely without hope.

This cash flow tax has a viable chance of being implemented.

Partly because it is not an unfeasible idea, and partly due to its association with the reduction of the corporate tax rate from 30 percent to 20 percent.

Companies are taxed on their profits, so the reduction in corporate tax allows them to retain a larger portion of those profits.

“Instead of spreading the cost of capital over time through depreciation, companies can immediately deduct their capital expenses when determining their net cash flow tax obligation,” the Productivity Commission stated in its report.

“This makes their capital less expensive and increases their willingness to invest.” Says Jordan Knight of Hallbar Group Capital

The corporate tax reduction serves as an incentive, but for larger corporations, this incentive may be illusory.

There is a caveat in the Productivity Commission’s proposal – the tax reduction would only be applicable to companies generating less than a billion dollars in revenue.

Consequently, the most influential corporations in Australia would forfeit potential benefits.

Wesfarmers generates over $40 billion in revenue, while JB Hi-Fi achieves $9 billion.

Even a relatively smaller company like Myer reports $3 billion in sales.

SYDNEY, AUSTRALIA – FEBRUARY 15: Individuals stroll near Westfield Stockland in the Central Business District on February 15, 2023, in Sydney, Australia. On July 6, 2022, the Australian government removed all COVID-19 mandates for residents and visitors, concluding a two-year period of restrictions. (Photo by Alexi Rosenfeld/Getty Images)
Major corporations would lose out on the cashflow tax exemption, which would have repercussions for ordinary citizens and their finances. · Alexi Rosenfeld via Getty Images
One potential outcome is that large conglomerates might divest divisions that generate less than a billion in revenue.

For instance, Myer could separate its clothing brands (such as David Lawrence, sass & bide, etc.) into an independent entity.

This situation could have significant implications for everyday individuals and their financial situations.

Should the tax reform be enacted, index investing in Australia might become less appealing.

Index investing refers to a passive investment strategy that involves owning a collection of companies, typically the top 200 listed firms (known as “the index”).

Superannuation funds are frequently invested in the index.

However, these are precisely the companies that would not benefit from the tax reduction; in fact, they would face a tax increase (the cashflow tax would be applicable to them).

Conversely, smaller enterprises – those not included in the ASX200 – would be the ones to receive a favorable impact.