Government's doubling of withholding tax an unnecessary and stupefying own goal

“The Australian government is hanging out the open for business sign, and demonstrating our very real commitment to attracting investment in the tourism industry.”

-Martin Ferguson, Minister for Tourism, May 2, 2012

Just six days after Martin Ferguson told the world “it is time everyone understands Australia is not only a great place to visit but a great place to invest”, Treasurer Wayne Swan vowed to double taxes on international investors.

Ferguson’s Australia Unlimited launch, his glossy Australian Tourism Investment Guide, which boasts of our low 7.5% withholding tax, plus the website of 80 “investment ready” projects is ludicrous in light of the Treasurer’s budget announcement.

Japan and Singapore became more attractive investment destinations on budget night.

Stunned investors across the world and in Australia condemned the decision and the damage it does to our reputation as a safe haven for capital.

They also acted.

Some of the planet’s most reputable pension funds froze negotiations with Australian partners within hours of the government’s announcement.

Since then, several have reallocated their capital to other countries. One fund has already redirected nearly half a billion dollars of investment to China.

The doubling of withholding tax to 15% is a stupefyingly unnecessary own goal.

It’s bizarre that the government has ignored its own game plan for transforming Australia into a funds management hub.

Introducing the lower withholding tax regime in 2008, then assistant treasurer Chris Bowen said sagely: “You do not create a financial services hub through tinkering.”

David Bradbury, who is now the Assistant Treasurer, said: “If we are to be internationally competitive then … we must have rates of taxation that are amongst the lowest in the world.”

In short, he acknowledged that a small country like Australia needs the additional appeal of lower taxes to attract the globe’s flighty capital.

These days he boasts that we’re better off in the middle of the pack.

Since when is it smart to squander a world-beating lead and head for mediocrity?

The point of a low tax is to persuade more of the world to give us their savings to manage.

The strategy was working. Inbound international investment rose fivefold after 2008. We were on track to becoming the region’s funds management front runner.

At a time when other property markets were tanking, inbound investment supported local asset prices.

The extra international investment also reduced Australia’s reliance on debt finance.

As a double bonus, these new investors were quality long-term players, such as pension funds, sovereign wealth funds and global REITs.

In the main they financed quality assets that delivered community and environmental dividends. Just look at the number of five and six star green star buildings funded by international investors.

The government is now trashing this successful strategy at a time when Europe, which finances 80% of the world’s trade, is careening into a double dip and Asian growth is moderating.

It makes zero sense to become less attractive to the world’s savers at this dangerous economic tipping point.

We should reinforce our reputation for stability, not vandalise it.

Ferguson’s plea for international investment is just as relevant to sectors besides tourism, especially infrastructure.

Cash-strapped state governments will be big losers from a higher withholding tax.

The government says a steeper tax will increase its revenue.

In fact, its higher tax rate will decrease investment, imperil jobs in a construction sector that hasn’t recovered from the GFC and shrink overall tax revenue.

Less economic activity and less employment will result in less taxes across the board, including GST, corporate and property taxes. The government wants more money – it will get less. The measure will backfire.

Adding insult to injury, the budget also dumped the CGT discount for foreign investors.

The Property Council is working hard to persuade the Parliament to stick with a low withholding tax regime.

Peter Verwer is chief executive of the Property Council of Australia.