Business Daily Media

Qantas and other big Australian businesses are investing regardless of tax cuts

Research[1] shows that tax cuts lead to increases in corporate investment. But analysis of Australian companies’ financial statements, and what American companies have done since the Trump tax reform[2], show this increased investment could be rather small.

High-profile Australian CEOs have been campaigning[3] for company tax cuts, claiming it would lead to more corporate investment, jobs and even wage rises.

But it is unlikely that a lower tax rate will be a key driver of investment. Especially as companies like Qantas have already announced[4] billions in investments.

Read more: Why Australia doesn't need to match the Trump tax cuts[5]

The idea behind tax cuts driving investment is that they create more “free cash flow[6]”. This is the amount of cash a business generates from its day to day operations minus what it spends on capital expenditure (property, equipment and maintenance for example).

Studies[7] show more free cash flow does, on average, lead to increased investment. But the extra cash is also used to pay down debt, pay dividends and increase working capital (cash used for day to day expenses).

Qantas CEO Alan Joyce has been one of the most vocal[8] proponents of corporate tax cuts, claiming it could lead to new routes and the purchase of new aircraft.

This is plausible, but a 5% tax cut is not likely to lead to huge increases in profitability or cash flows for Qantas. At least in the short term.

Qantas currently has[9] A$951 million of tax losses due to a couple of lean years before 2014[10]. These can be used to offset any future taxable income.

Qantas will not pay tax until its profits in the years after 2014 exceed the tax losses recorded before 2014. Only once these tax losses have been used up will a lower tax rate lead to an increase in cash flow.

But even if Qantas didn’t have tax losses, the impact of the tax cut would be marginal. Analysts are forecasting[11] earnings growth of 1.2% for Qantas in the 2018 financial year.

Given 1.2% profit growth, a 5% reduction in Qantas’ effective tax rate would mean an additional A$60 million in after tax profit in 2018.

This additional A$60 million for Qantas is relatively small when you compare it to the A$3 billion[12] in capital investment already announced for 2018 and 2019.

This investment was planned, and it’s irrespective of any tax cuts. Qantas generated over A$2.7 billion in cash in 2017, so the A$3 billion capital investment was already plausible without a tax cut.

A similar analysis on Wesfarmers’ 2017 results[13] shows a 2017 pre-tax profit of A$4.1 billion. A 5% reduction in the tax rate would correspond with an approximate saving of just A$206 million in 2017, compared to A$ 1.6 billion in capital investment[14].

For a smaller company like MYOB[15], with a pre-tax profit of A$73.7 million in 2016, the impact is even smaller. A 5% tax saving would result in an increase in after-tax profits of just under A$4 million.

Read more: Business investment is weak, but an unfunded company tax cut won't fix it[16]

So, it is plausible that tax cuts could lead to increased investment, more jobs or higher wages. Changes in tax rates can affect both investment decisions and shorter-term operational decisions.

But beyond the circumstances of individual companies, there are other factors that in how tax cuts factor in to company investment. This includes how competitive[17] an industry is, and whether it is capital or labour intensive.

When corporate taxes are changed, firms will also[18] try to shift their spending and profits, where possible, in order to claim the most profits in periods of lower tax.

One way to do this is to pay bonuses. In the United States, we have seen over 150[19] public companies announce bonuses following the recent tax reform. These bonuses are not a permanent salary increase. They are being paid this year, reducing the firm’s current taxable income, before tax rates change.

While the claims of increased corporate investment and jobs are supported by the research, and even the recent US experience, we should be wary about how large the benefits are.

References

  1. ^ Research (faculty.tuck.dartmouth.edu)
  2. ^ Trump tax reform (theconversation.com)
  3. ^ campaigning (www.businessinsider.com.au)
  4. ^ already announced (www.qantasnewsroom.com.au)
  5. ^ Why Australia doesn't need to match the Trump tax cuts (theconversation.com)
  6. ^ free cash flow (onlinelibrary.wiley.com)
  7. ^ Studies (faculty.tuck.dartmouth.edu)
  8. ^ one of the most vocal (www.businessinsider.com.au)
  9. ^ currently has (investor.qantas.com)
  10. ^ before 2014 (investor.qantas.com)
  11. ^ forecasting (www2.commsec.com.au)
  12. ^ A$3 billion (www.qantasnewsroom.com.au)
  13. ^ 2017 results (www.wesfarmers.com.au)
  14. ^ in capital investment (www.wesfarmers.com.au)
  15. ^ MYOB (investors.myob.com.au)
  16. ^ Business investment is weak, but an unfunded company tax cut won't fix it (theconversation.com)
  17. ^ how competitive (www.businessinsider.com)
  18. ^ will also (www.jstor.org)
  19. ^ over 150 (www.atr.org)

Authors: Jeff Coulton, Senior Lecturer, UNSW

Read more http://theconversation.com/qantas-and-other-big-australian-businesses-are-investing-regardless-of-tax-cuts-90536

Business Daily Media Business Development

Turning resolutions into short-term survival and long-term growth tactics

Few Australian industries have been harder hit by the pandemic than hospitality. After two years of lockdowns, social distancing restrictions, staff shortages and supply chain woes, 2022...

Paul Hadida, General Manager, APAC at SevenRooms - avatar Paul Hadida, General Manager, APAC at SevenRooms

The ‘baby bust’ is set to kick-off an AI-boom

The Australian workforce is set to see almost an entire generation retire within the next 15 years. Firstlinks predicts that there will be more baby boomers exiting the workforce than 15-y...

Andy Mellor Regional Vice President of Australia at Kofax. - avatar Andy Mellor Regional Vice President of Australia at Kofax.

How Microsoft's Activision Blizzard takeover will drive metaverse gaming into the mass market

Ready Player 1,000,000,0001?Sergey NivensMicrosoft was positioning itself as one of the pioneers of the metaverse even before its US$75 billion deal to buy online gaming giant Activision Bli...

Theo Tzanidis, Senior Lecturer in Digital Marketing, University of the West of Scotland - avatar Theo Tzanidis, Senior Lecturer in Digital Marketing, University of the West of Scotland

Some of the super-rich want to pay more tax – but society cannot afford to depend on them

Shutterstock/PilgujDemands for the super wealthy to pay more taxes are not new. But they don’t usually come from billionaires or millionaires.Yet on January 19 2022, around 100 of the ...

Peter Bloom, Professor of Management, University of Essex - avatar Peter Bloom, Professor of Management, University of Essex

A killer app for the metaverse? Fill it with AI avatars of ourselves – so we don't need to go there

Ready avatar one?Athitat ShinagowinBig numbers coming. Microsoft’s US$75 billion (£55 billion) acquisition of Activision Blizzard has landed – true to Call of Duty vernacul...

Alex Connock, Fellow at Said Business School, University of Oxford, University of Oxford - avatar Alex Connock, Fellow at Said Business School, University of Oxford, University of Oxford

Labelling Equipment; Prayers Have Been Heard and, Answered

If you are an instrumental part of a management team for a business that now requires labels for their products or goods, then traditionally you’d have had one of three choices, if the...

Business Daily Media - avatar Business Daily Media



NewsServices.com

Content & Technology Connecting Global Audiences

More Information - Less Opinion