Crikey

Millions of Australians will lose from Tony Abbott’s idea of taxing profitable companies to pay for his exaggerated version of the baby bonus.

People with superannuation, either in managed funds, run by retail or industry groups, or self- managed, will be the hardest hit, along with investors holding shares directly.

Big companies such as Telstra will be impacted at a time when its share price is already under pressure. With the Future Fund (Australian taxpayers), still owning a swag of shares in the company, we all will suffer.

In all the commentary about the absurdity of Abbott’s 1.7% levy on the profits of Australia’s 3000 most profitable companies such as in the Fairfax broadsheets this morning, one very, very important point has been lost.

There’s has a lot of talk about the impact on costs and prices and employment. But that’s marginal issues. The $2.7 billion a year, $11 billion-plus four-year cost of his idea will predominantly come from shareholders, which include nearly every one of the more than 10-plus million working people in this country.

According to Australian Stock Exchange figures “retail investors directly own slightly less than 20% of all listed equities, with domestic institutions owning slightly less than 40% and foreign investors slightly more than 40%.”

So about 60% of all shares on the ASX are owned by Australians, one way or another, and these are concentrated in the four big banks, BHP and Rio Tinto, Woolworths, Wesfarmers, the AMP, AXA, Telstra and others with a market capitalisation of $1 billion or more, which in turn account for 90% of the market’s valuation.

According to the ASX at the “end of 2009, a total of 175 companies had a market capitalisation greater than $1 billion, with 385 companies between $100 million-$1 billion, 534 companies between $20 million-$100 million and 855 companies below $20 million.

The companies valued below $20 million are unprofitable or barely profitable miners and small industrials. The bulk of the companies that will pay the tax are in the next groups, right to the 175 worth $1 billion or more, which is where investors concentrate.

This has been ignored by political commentators in the big papers and electronic media. (They are as removed from the real world of business as  Abbott).

What they don’t understand is that the easiest way for profitable companies to pay the tax will be to either cut dividends, or not increase them, even if profits are rising.

While some groups (accountants mainly) are saying companies can restructure to save tax, the stamp duty costs of doing this these days is prohibitive. The easiest way is simply to either cut dividends, or not increase them. Much easier than pushing up prices.

This will apply to all listed companies, as well as private groups. All make distributions one way or another. The listed companies make them to shareholders, which in most cases include super funds, both retail, industry and self-managed funds.

Other investors own shares in their own right and will lose directly. Self-funded retirees will be hurt more than anyone because they depend more on dividends for their income than do wage earners.

Because he will be taking earnings from companies, their share prices will be impacted, their prices will fall or no rise by as much because their dividend yields and price earnings ratios will be adversely impact. They are crucial measurements for investors in assessing the worth of listed companies as an investment.

Companies will underperform the market, which will underperform as a whole each year because $1 billion to $2 billion a year in earnings are being stripped out by this odd new tax.

Investors will take their money from the market (or not commit as much), to invest in other riskier or lower taxed investments.

Because people who retire get paid their accumulated earnings based on a valuation at the time of their retirement, they will suffer because of the Abbott tax sees share prices sag or not perform as well, the valuation will be lower than they might have been. The retirees will have less money to live on, and if they invest their funds in shares, they will have even less to retire on.

Some commentators have claimed there is an argument in favour of the tax in that companies should pay for the cost of things like maternity leave, because they get a benefit. But is that then outweighed in this case by the tax reducing the disposable and retirement incomes of millions of Australians, directly or indirectly?

The big problem here is that the people most damaged by this are usually older retirees or workers who get no benefit from maternity leave because they have had their families. Now if the Abbott tax becomes law, they will lose out to a bunch of younger people (who will lose in the long run by having their super perform less than it should).

Companies not making profits will see their shares made more attractive: they are usually far more speculative companies, with riskier business plans that generate capital gains rather than income.

According to yesterday’s Australian Financial Review wrap up of the 2010 interim reporting season, a total of $17.9 billion of dividends were declared by companies (Macquarie research) for the December 31 half year. That was up $1.2 billion, as companies recovered their poise and profits from the crunching of the previous year to 18 months.

Assuming the majority of those dividends are being paid by companies earning more than $5 million a year, if the Abbott tax had been in place, that $1.2 billion increase would have been chewed up by his child care tax and the total would have been actually cut below the $16.5 billion paid out in the December 2008 half.

The AFR said Macquarie is estimating a $3.5 billion rise in full year dividends to $45.1 billion. That increase would be halved if the Abbott tax was in place this year.

There are a whole lot of other things that Abbott hasn’t clarified. Companies presently pay tax on the basis of consolidated profits, will he impose the levy on this basis (and on a pre-tax basis), or on an individual company basis: if he does this, then many companies will find their profits being taxed twice at least.

Will foreign companies pay the levy? If they do, they will have an advantage over Australian companies in that they will get a credit in their home countries for the 1.7% impost. How will it be paid, per quarter, half year, or annually? Will it be paid in advance or arrears?

Big private groups will be hit; the Pratt empire, the Smorgons, Solomon Lew, Stan Perron, Kerry Stokes’ Australian Capital Equity, as well as his listed groups. James Packer’s Consolidated Press. For may of these groups, there will be double taxation. For example,  James Packer’s Crown and Cons Media will pay the levy, then Cons Press Holdings will be up for a 2.7% payment, unless it can find losses to shelter its profit streams.

The same applies to Stokes’ private company ACE and its holdings in the about to merge Westrac/Seven Network.

One thing is certain is that PBL Media, which owns the Nine Network and ACP Magazines, won’t have to pay the levy, that’s if the tax is imposed on an after-tax basis. Nor Will Seven Media Group, if it is on an after-tax basis.

For example, will News Corp pay: it is listed here, but based in the US. Will its local arm News Ltd pay? And will its 50% owned Premier Media Group pay, and 25% owned Foxtel pay? If they do and News Pays, there’s double taxation at work, unless companies further up the chain get credits.

Telstra owns 50% of Foxtel. Will Foxtel pay and Telstra get a credit, or will Telstra pay and then claim it back from Foxtel?

That’s unlikely, the easiest way would be to add it to company tax payments. But if it is levied on profit before tax (so-called EBIT or EBITDA), then the net will capture more than he thinks.

The putative Treasurer Joe Hockey should be out clarifying these questions, but he’s been silent. I bet you his phones haven’t.