Investment allowances, not a company tax cut, our biggest priority

Olympic Dam. Pic: Kelly Barnes

The Reserve Bank has isolated Australia’s greatest single weakness.

Non-mining investment in Australia is at a 58-year low at just nine per cent of GDP. This will lock Australian shares into a generation of underperformance to the rest of the world which is “going full steam ahead” into a technology-driven investment and research revolution of incredible proportions.

To drive America into leading that revolution President Trump has slashed regulations, allowed US companies to write off their investments against profits and reduced company tax (in that order on importance).

The Business Council of Australia, which represents Australia’s top 150 companies, is urging the federal fovernment to embrace one of the Trump measures — lower company tax.

Given the massive spending waste in Canberra and the states, we cannot duplicate the US in lowering both company tax and investment write-offs.

So in the national interest I ask every one of the 150 members of the Business Council of Australia to think deeply and ask themselves one simple question: What would be best way for Australia to overcome its greatest weakness ---lower company tax or to increase investment allowances, accelerated depreciation and research deductions?

Our savings are invested in many cash-rich Australian companies that have virtually frozen their investment and are falling behind the world. And yet those at the top of the business council are campaigning for tax cuts knowing it eliminates investment allowances.

It took incredible courage for Orica chief executive Alberto Calderon to stand before the Melbourne Mining Club in the presence of his chairman, BHP director Malcolm Broomhead, and declare that the best way to boost desperately-needed investment was to boost investment allowances, not lower company taxes.

A few days later BHP CEO Andrew Mackenzie, Woodside chairman elect Richard Goyder and Qantas chief Alan Joyce went against Calderon and chose company tax cuts. While it would be good to follow Trump all the way and introduce both company tax cuts and investment write-offs, we need to make a choice. In my view Calderon is right and Mackenzie, Goyder and Joyce, along with the Business Council of Australia executive are pushing the wrong priority button.

Let me be brutally frank.

Handing our biggest taxpayers, banks, miners and retailers a fist full of cash, where in the case of Australian-owned companies shareholders will demand higher dividends, is not an efficient way to boost investment.

President Trump knew that while tax cuts would help investment, it would be the ability to write off new plant investment that will deliver the goods. And when it comes to pay rates American companies may use the tax cuts as a reason for pay increases but the real reason is that there is a shortage of labour emerging in the US.

I repeat that in an ideal world we should do both, as the US has done, but with our politicians hooked on wasteful spending we don’t have the choice of both.

And Australia has a problem — we have a bunch of institutional analysts who set the investment return bar too high for capital investment and who don’t understand the long-term value of research. They are acting against the long-term interests of Australian superannuation fund members in favour of short-term gains. This doubles the priority need for investment allowances etc.

To illustrate the problem in Australia I again describe how Australia’s largest non-gas mineral development — BHP’s multi billion Olympic Dam extension --- has become a possible casualty of Donald Trump’s tax package.

In 2016 BHP was adamant that Olympic Dam stage two would be its next major copper project after the extensions to Chile. Olympic Dam would rank ahead of the giant Resolution copper mine in the US, where BHP has a 45 per cent interest.

At the moment BHP is involved in a significant investment in Olympic Dam to de-bottleneck and improve the productivity of the operation. That investment is not in danger.

What is in danger is the next and much larger stage, which involves the construction of a huge, underground mine and a major investment in leaching to produce both copper and uranium. Although theoretically possible, it is unlikely that BHP would proceed with two enormous copper projects at once.

Donald Trump is offering projects like Resolution the ability to write off their new mine investments with one stroke of a pen. But there is a catch. The projects must be started by September 2022.

Rio Tinto and BHP will require approval from local authorities and the Indian tribes that have the land. That will take some years, which means that there will be rush to get Resolution started before the Trump time clock ends.

Olympic Dam also requires time to engineer the underground mine and leaching plants (both excersises are under way) plus the normal bureaucratic ridden approvals. If BHP doesn’t want to develop the two mines at once then if Resolution is ready by September 2022 it may get the nod ---particularly as it will be a Rio Tinto decision.

If BHP has to choose between Resolution, where it can write off expenditure, and an Olympic Dam project that cannot, but which benefits from a lower Australian tax rate, which way will BHP go? Theoretically, all other things being equal (and, of course they wont be) it will choose Resolution. To give Olympic Dam a much better chance we need to match Trump in investment write-offs.

And the Australian investment community wants BHP to achieve an outrageous 20 per cent return. Being able to write off the investment will help that process.

And so I implore each company in the business council to first read the full Calderon address to the Melbourne Mining Club, here. Then think hard about your shareholders’ long term interests and that of the nation.