Labor's thin capitalisation plan attacks infrastructure investment


Bill Shorten’s war on business attacks arrangements that are essential for major infrastructure projects, which grow the economy and create jobs.

Mr Shorten’s thin capitalisation policy would see an increase in the cost of capital and would put at risk current and future investment in vital infrastructure projects.

It would have a significant impact on investment by foreign pension and sovereign wealth funds - funds which are considerable investors in Australian infrastructure.

Treasury has confirmed both in Senate Estimates and in an Executive Minute, released under Freedom of Information laws, Labor’s thin capitalisation laws would cost jobs.

Labor’s policy states that it will: “amend the current thin capitalisation rules to reduce the amount of debt that multinational companies can claim deductions for in Australia. Companies will no longer be able to claim up to a 60 per cent debt-to-equity ratio for their Australian operations. Instead, deductions will be assessed on the debt-to-equity ratio of a company’s entire global operations.”

This will have serious adverse consequences for investment in Australia.


Labor’s thin capitalisation proposal: what it would do

InfraProjectFund Ltd is a Canadian domiciled investor. InfraProjectFund raises equity primarily from pension funds to invest in infrastructure shares and direct infrastructure projects. InfraProjectFund does not borrow money itself, and as an equity investor the worldwide group has a gearing ratio of only 10 per cent.

InfraProjectFund’s Australian subsidiary TownLink is building to operate an important toll road. In order to finance the project InfraProjectFund intends to invest $40 million in equity and borrow $60 million in Australia.

TownLink has a choice of borrowing from Australian banks at 10 per cent - which would make the project unprofitable - or at 5 per cent from InfraSub, a Canadian subsidiary of InfraProjectFund.

Under current rules, TownLink can deduct the full amount of interest payable to InfraSub because its Australian debt to equity ratio is 60 per cent.

But under Labor’s proposed rules, TownLink can only deduct interest on $10m of its debt, reducing its annual after-tax profit by $750,000. This would make the project unprofitable for TownLink. As a result of Labor’s policy, the road would not be built.

The Australian Petroleum Production and Exploration Association’s Malcolm Roberts has described Labor’s policy as “a blunt instrument hitting all businesses.”

“At a time when Australia must compete with many non-OECD countries which are courting overseas investors, we should avoid blanket and inefficient measures which undermine project economics.”

[Source: AFR 14/5/16].

Labor’s policy will reduce the attractiveness of Australia as an investment destination at a time when Australia needs more investment to grow the economy and create jobs.

Labor’s changes would be bad for business, bad for investment and bad for jobs.