A key feature of last year’s budget was the $27 billion investment allowance which brings forward tax deductions for capital or equipment purchases instead of following traditional tax depreciation schedules over the useful life of the asset. The Commonwealth Treasurer, Josh Frydenberg has now responded to low business investment by extending this temporary investment allowance for another year until FY23 at a cost of $18 billion to give it some more time to work its magic. The investment allowance is a timing difference (i.e. timing of the tax deduction) and therefore is a clever way to incentivise businesses to spend now but ultimately not lose tax revenue over the life of the asset. Furthermore, the ‘cost’ to Government is tempered by the extent to which it is taken up by corporate Australia.
In order for the investment allowance to provide a timely “cash kick” to corporate Australia, companies will need to:
- return to profitability quickly (deductions only provide a “cash kick” to companies if they are profitable, by reducing the tax payable on that profit); and
- have an ability to fund new investment in order to receive the brought-forward tax deduction.
The question of whether a company has returned to profitability depends largely on the industry it operates in and its competitive position within its market. Whilst there are some pockets of the economy that have done better than others, it is clear that the Government (and many economists) underestimated the speed of the recovery.
The second challenge for companies in getting a “cash kick” is whether they can fund the new investment. Industries and companies will have very different cash reserves and access to new debt or equity to fund capital investment, raising questions around the breadth of industries and corporates that will benefit. Since the last budget the Government tweaked the revenue threshold calculation, to enable businesses to exclude their foreign revenue, effectively opening up access to the incentive to large multinationals, recognising these businesses as those most likely to both quality and benefit.
We also note that another initiative extended to FY23 from last year’s budget was the temporary ability for companies to utilise current losses and “carry them back” to offset against prior year profits (ordinarily losses are only able to be carried forward). These two initiatives together would enable businesses to utilise current losses created as a result of capital investment, to reduce prior year tax payable, providing tax relief across multiple years.
Last night, the Treasurer was quick to point out that “spending on machinery and equipment increased at the fastest rate in nearly seven years” but failed to highlight that business investment is still 5% lower than pre-COVID levels. Australia’s economic recovery is also currently underpinned by consumer spending rather than capital investment.
Even with business confidence on the rise it remains to be seen whether this incentive will convert to investment as companies continue to horde cash reserves and borrowing firepower to fund operations (or working capital) rather than capital investment. Well capitalised big businesses are best placed to fund investment but the benefits of the incentive may elude businesses and industries in most need of support on the path to recovery.