Lowering the company tax rate in the Northern Territory is a policy thought-bubble that may have unexpected consequences, writes Shane Riley.
I’m a proud Territorian, so when Prime Minister Kevin Rudd took time in his election campaign to announce that “I love the Territory” my ears immediately pricked up.
Unfortunately, Mr Rudd decided to express this love through a “personal objective … for it to have a company tax rate one third lower than that of the rest of the country.”
Just how creating an Australian tax haven is good for the Territory - or the rest of Australia for that matter - is unclear to me.
We’ve seen a fair amount of press about how multi-national companies such as Google and Apple are avoiding paying tax in Australia by shifting their profits into ‘low tax’ or ‘tax free’ countries like Ireland and Singapore. Treasury has stated that they are unable to address this problem due to “deeply entrenched features of Australia's corporate tax system”.
Reducing the Northern Territory's corporate tax rate is effectively creating a new ‘low tax’ zone. This zone will be accessible to local companies and therefore even more likely to be taken advantage of.
If we can’t stop multi-national companies moving their profits out of Australia then what is to stop companies based in Sydney or Melbourne opening a token ‘head office’ in Darwin simply to lower their tax rate?
From a business standpoint it would make good sense - but at what cost?
Who knows, Darwin might end up being the official PO box of all our mining companies and banks. We could have a flood of businesses relocating their official base up there. It could become an Australian version of the Cayman Islands without all the foreign investment.
While lots of companies opening shop in the NT might look good on paper, somehow I don’t think they will translate to jobs.
The economic impact of companies moving to a lower tax region creates problems for us all; a lower tax rate means less money for the government. If government tax revenue drops they need to either reduce their spending or find it elsewhere.
Since Mr Rudd's announcement, we've been told that the policy had probably lacked the “orderly consultation with cabinet colleagues on any major decision of the government” that the Prime Minister promised in July. Employment and Workplace Relations Minister Bill Shorten revealed that he had not been informed of the policy. When Finance and Deregulation Minister Penny Wong was quizzed on radio she refused to endorse the policy.
There is strong evidence that the constitution specifically forbids having different tax rates in different states and territories. If that is the case there would need to be a referendum to enact the law, which is a bit far-fetched.
It fairly likely that this is another example of Kevin Rudd making policy without preparation or consultation. It is a policy that at best will not work as intended and at worst can cause significant damage to the economy.
There are possibly better ways to express one's love for the Territory. Flowers perhaps?
Shane Riley has an MBA from Macquarie Graduate School of Management and is a senior manager in the financial services industry.