Killing capex one month at a time

Australian companies have responded savagely to the decision by Wayne Swan to rob them of large chunks of their working capital.

When Wayne Swan introduced his mini budget, or the so-called MYEFO, he took an action which attracted very little criticism. He made large companies – those with turnovers of over $1 billion – pay their tax on a monthly basis. And Swan plans to gradually lower the accelerated tax cut-off point to where, by 2016, the vast majority of companies that trade in Australia, including the bulk of small enterprises, will have to pay their tax instalments monthly rather than quarterly.

In 2012-13 this will bring forward an amazing $5.5 billion in revenue for the government, which will see our large companies drain their cash reserves and/or increase their bank borrowing. And, of course, the amount of money that is raised by this mechanism will increase even further as the monthly payments spread to smaller enterprises.

There has been no analysis of the impact of this measure on corporate Australia but in December Business Spectator, as part of its Pulse Survey of CEOs, asked Australian companies about their capital investment intentions.

Just three months ago in the third quarter, some 46 per cent of Australian companies planned to increase their capital expenditure. This slumped to 34 per cent in the final 2012 quarter. Two years ago it was 64 per cent (CEO PULSE: Snapping the wallets shut, December 11).

The companies are simply not prepared to substantially increase their debt or run down their liquidity to lift capital expenditure in the light of the government's plan to drain their money.

The profitability of Australian companies will vary from sector to sector but in a vast number of sectors, including manufacturing and non-food retail, there is not a lot of joy. And yet the funds exodus hits them as well as more prosperous enterprises.

And of course in the mining sector, which has been a huge driver of capital expenditure, most new projects that haven't already been started have been mothballed. The new tax rules will take a big slice of the cash flow that currently comes from existing projects.

The same cash drainage will eventually happen to those currently under construction, although the looming fall in gas and oil prices may mean that many new ventures will not pay tax for a long time. Australia needs capital investment from its corporations if it is to grow and if our corporations are to keep up with their overseas rivals. It is just so easy for Treasury to make decisions to drain corporate cash and not bother worrying about the consequences.

I am not sure that they also understood the consequences of taking into government coffers all the money in the dormant superannuation funds.

Our big private funds are squeezed between the industry sector and the self-managed fund sector and the government decision took a large amount of money out of the system and lowered their economies of scale.

It is possible that in due course many of the fund managers who are struggling will go out of business and the government would have contributed to this.