Changes to treatment of ageing capital stock could help prepare for Asian century: Tax experts

Tax experts say the prospect of changes to depreciation rules could encourage companies to upgrade their plant and equipment and provide a fillip to capital-intensive industries such as manufacturing and agriculture.

Paul Drum, business and investment policy head at CPA Australia, says with capital investment outside of the mining sector lagging, it makes “perfect sense” to redress the slide.

“We need to revisit this to incentive businesses to remain competitive and keep up-to-date with items of plant and equipment,” Drum says.

The comments come as Trade Minister Craig Emerson noted that the high Australian dollar discouraged businesses from upgrading capital stock, with Labor believed to be working on changes to the treatment of tax losses and depreciation rules that could be announced in the federal budget in May.

Drum says about a decade ago, business gave up a lot of accelerated depreciation on capital stock in exchange for a lower corporate tax rate, but over the years accelerated depreciation has crept back in to a few sectors, such as agriculture. The Government recently announced tax sweeteners to boost the shipping industry.

With troubled industries such as manufacturing not able to depreciate their assets as quickly, Drum says Australia needs a “blueprint as to what industries will be encouraged and discouraged this century.”

“In the context of Australia in the Asian century and our international competitiveness, we need to see what policy levers need to be pulled to ensure we can address those challenges.”

“If we were drawing up a map of what Australia will look like in the next 10, 20 or 30 years, there’d be mining, agriculture, services, IP [intellectual property], maybe high-tech manufacturing,” Drum says.

Emerson told the Australian Financial Review there is a “real productivity issue for Australia in the ageing of our non-mining capital stock.”

“Any business which is considering replacing old machinery has got to be able to recover the investment in new plant and equipment.

“When their operating margins are lower because of the high dollar, it is harder for them to recover that investment.

“The result is that they continue operating with machines which are less efficient and less productive.”