Creating a profitable future for Australia

| October 21, 2015

Australia needs more multi-national companies based here, argues KPMG’s Grant Wardell-Johnson, and their focus needs to be squarely on Asia.

I have an economic vision splendid for Australia with several prominent features in the broad landscape.

One is a large number of Australian-based multinationals with head offices located in our major capital cities looking out at the world, and particularly Asia. Some of those multinationals will be large, others medium-sized, but it is the outward focus that is key.

Question: What is the enemy of this vision?

Answer: Insularity. Looking inwards and not out to the world.

It is Economic History 101 that looking inwards ultimately will lead to a decline in living standards. This is writ large in the history of China. In the first half of the 15th Century China was leading maritime nation and a country with one of the highest living standards. But by the 1470s, a policy of introversion took over. Shipyards were closed and China sat behind a Great Psychological Wall. China’s decline was rapid and within a couple of centuries had fallen to near the bottom. Its fortunes have changed dramatically since Deng Xiaoping commenced to look out again in 1983. The results are impressive, even though we have day-to-day concerns about the sustainability of the very high rates of growth achieved.

The history of the Iberian Peninsula in the twentieth century is one of decline through insularity. And Chile and Brazil are stories of the success of looking out despite the current hiccups.

There are many factors that drive insularity. They are mostly about culture, confidence and connection.

Investing offshore vs onshore

And tax plays a role. How so? Our imputation system promotes Australian investment rather than Australian companies looking overseas. Australian profits generate Australian tax which generates franked dividends for shareholders. Overseas profits generate exempt dividends for Australian companies and unfranked dividends for shareholders. Thus Australian boards are under pressure from Australian analysts to produce Australian profits and not overseas profits at least up to the level of the dividend payout ratio. The situation with super funds is similar.

One potential solution is to provide a discount, say 25% on unfranked dividends so that only 75% of the dividend is treated as assessable income. This is contained in the KPMG Tax Submission on tax reform and is part of a proposal for the consistent treatment of personal capital taxation including the taxation of interest and rental properties. The proposal would partially address the imbalance in the tax system towards Australian investment.

Some, possibly many, would ask why would we want to do that?  Why would we want to have Australian capital invested offshore rather than onshore?  Surely we need our precious capital to enrich local industries with local markets and local jobs. Is not my vision is a quixotic one, with huge windmills of difficulty entering new markets, while Dulcinea is on our very shores?

An answer is that offshore is where our future lies. Apart from the financial returns, managing an offshore business world provides connectedness to other cultures that brings out new ways of doing things and new manners of thinking. Overseas is ultimately where creative new markets will be. Our head offices here will produce the better jobs with flow-on effects to other parts of the service economy. Our overseas focus will attract and retain more entrepreneurial thinking, right throughout the business spectrum from start-ups through medium size enterprises and to the largest of multinationals.

Entrepreneurial investment

Where is the capital to make such investments?  Historically capital has been the scarcest of resources in a business environment. In fact the world is awash with the stuff, albeit with much less in Australia. But much of it is timid, bashful and reticent: there is about $1.6 trillion in cash sitting on balance sheets of the world’s major companies, just sitting there. Some capital is fast, fluid and faithless: the median shareholding period throughout the world is about 10 months. True some capital looks lengthy and elongated, but it is generally low-risk, such as infrastructure investment for superfunds or pension funds. Or it is a strategy for emerging nations to secure resources that they need to grow.

But there does not seem much left over for the long-term entrepreneurial vision in developing new markets in a geographical sense or creating new markets in a product or service sense. Unfortunately many boards and senior management focus narrowly on the risk-adjusted cost of capital and internal rates of return which are naturally going to point to lower-risk short term projects.

Finding capital with the right long term risk profile may be a challenge for our companies, but vision splendid lies in fortitude, talent and the odd decent tax policy setting.