Crossbench MP Allegra Spender has teamed with Labor-linked business figures for a last-minute push to block a government plan they argue would make investor taxes among the world’s highest.
The Community Strong party co-leader is trying to convince Labor to change course on its latest tweak to a key budget tax reform – overhauling the capital gains discount – or influence the Greens to support her alternative proposal in the Senate.
Chalmers, who acknowledged the ambitious budget reforms were causing political pain, revealed a capital gains carve-out for innovative firms. However, Spender argued the exemptions were too narrow because they only applied to firms such as tech start-ups that were creating new or “significantly improved” products.
“Australia doesn’t need to be the lowest taxing country but it can’t afford to have the highest capital gains tax in the world,” she told this masthead, arguing that marketing, fashion, mining and other companies would not qualify for the exemption and would be hit hard.
“Productivity is the main game at the moment. It is critical that we build businesses of all shapes and sizes to drive our productivity. The government’s [carve-out] does not address the major flaws of CGT indexation and I am hearing about real-world consequences on investment and for people who are looking elsewhere to start businesses.”
Spender said Israel also used an inflation-adjusted model, though it capped the tax rate at 30 per cent whereas Australian firms could cop a rate into the 40s.
“I recognise it took real guts for the government to address tax in the budget and support the [negative gearing] changes in housing. But ... trying to patch it up with carve-outs and definitions of innovation creates a system that is overcomplicated, unfair and a drag on prosperity,” she said.
Spender’s call for retreat underlines the extent to which Labor’s budget changes and adjustments have alienated even those who back progressive tax reform.
Chalmers is managing the political blowback towards the budget as he tries to get ahead of a likely inflation uptick on Wednesday, with petrol prices surging due to the war in Iran and the RBA weighing up a fifth rate hike of the year on Melbourne Cup Day.
The treasurer told the parliament on Tuesday that the new concessions meant innovative firms “still receive a significant discount on a future capital gain”. Labor argues fears of much higher taxes under the new CGT model are overblown.
“These reforms give the private sector the tools and the tax concessions to help them succeed in an increasingly competitive world. The bill provides more certainty for investors and more incentives for innovation. Building on the $3.8 billion in new tax relief,” Chalmers said.
Those supporting Spender include former adviser to Kevin Rudd turned businessman Lachlan Harris; co-head of the University of Sydney’s Genesis startup accelerator Anna Fitzgerald; UNSW director of entrepreneurship David Burt; Australian Investment Council head Navleen Prasad; Airtree Ventures co-founder Daniel Petre, a recent board member of Labor’s National Reconstruction Fund; Seek co-founder Paul Bassatt; and former Business Council of Australia president Tim Reed, who sits on the government’s Climate Change Authority board.
Burt said the Labor’s proposed carve-out was “an unhelpful Kafkaesque maze” while Fitzgerald warned: “Don’t make the tax department pick innovators.”
“You can’t always identify tomorrow’s successful businesses from today’s definitions. We need tax settings that reward genuine risk-taking, not businesses that happen to fit a government checklist,” Fitzgerald added.
Harris, an early critic of the budget who warns that centre-left governments fail if they don’t drive prosperity, said defining innovative businesses was “a problem masquerading as a solution” which represented “bad policy, not hard reform”.
“Governments should not decide which business are incentivised to grow,” he said. “I am a proud Labor voter but in this case the government has taken a wrong turn.”
Labor’s overhaul of the flat 50 per cent CGT discount was designed to discourage speculation in housing. Under the new scheme, some investors will actually pay lower tax rates. But Spender is focused on those with low cost bases that grow quickly and would be hurt under the inflation-adjusted model.
Chalmers’ changes announced on Tuesday responded to anger from entrepreneurs who said the reforms created a perverse incentive to invest in blue-chip firms rather than smaller ones which may grow quickly.
Spender urged Labor to instead maintain the inflation-adjusted proposal only for passive assets. Active assets such as businesses should retain a 40 per cent discount – less generous than the Howard-era 50 per cent but closer to the figure proposed in the landmark Henry Tax Review in 2010.
A full costing from the Parliamentary Budget Office prepared for Spender shows her proposal would create a small but positive budget impact. “It will retain incentives for taking risk,” the PBO said. “It will help ensure Australia’s maximum rate of tax on capital gains remains internationally competitive.”
Former treasurer Wayne Swan said the reaction to Labor’s changes were overblown.
“Taxation of capital gains tax and so on is 20 to 25 years overdue,” he told an Australian Financial Review summit. “Everybody says what the country needs is strong structural reform. Jim [Chalmers] does it and the world goes berserk.”
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