RDP 2025-01: Are Investment Tax Breaks Effective? Australian Evidence 2. Overview of Investment Incentives in Australia

The ‘modern’ system of turnover-based investment incentives started in 2007, with the unification of small business tax concessions under a common turnover test of $2 million. Amongst other benefits, these changes enabled businesses that satisfied the turnover test to access instant deductions or ‘write-offs’ for depreciating assets costing less than $1,000 and allowed the cost of most other assets to be pooled and depreciated at an accelerated rate. Since then, there have been seven important changes to business investment incentives (see Table 1). Three of these incentives – the GFC tax credit and two COVID-19-related policies – were designed as countercyclical stimulus in response to adverse economic shocks. The other four policies expanded eligibility for ITB in terms of asset value and firm size in order to ‘structurally’ raise the level of investment to support productivity.^[2] In all cases the ITB applied only to machinery & equipment, while buildings were excluded. We use this exclusion both as a placebo test, and to differentiate ITB from the effects of corporate tax rate cuts that coincided with some ITB policies.

The first three policies relate to small businesses with a turnover of under $2 million.

The GFC investment tax credit (GFC 2009) offered a deduction for new business investment in addition to normal depreciation deductions. When the policy was first announced in December 2008 it afforded all businesses an extra deduction of 10 per cent (Swan 2008), which was then raised to 30 per cent in the March quarter of 2009 (Swan 2009a). In May 2009 the policy was further changed, which allowed for a differentiated benefit based on firm size (Swan 2009b). Small businesses were able to deduct a bonus 50 per cent for investment made from 13 December 2008 to 31 December 2009 costing at least $1,000 (with this applying retrospectively to investments made before the adjustment to the policy). Other businesses were allowed to deduct a bonus 30 per cent bonus on investments over $10,000 for investments committed to before 30 June 2009, and a 10 per cent bonus deduction for those committed to during the second half of 2009. We focus on the second half of 2009 for our analysis, when the subsidy rates differed substantially.

The small business incentive 2012 (Small 2012) gave businesses with a turnover up to $2 million an increase in the instant asset write-off threshold from $1,000 to $6,500 from 1 July 2012. Legislation enacting the increase from $1,000 to $5,000 was contingent on the passage of the Mineral Resource Rent Tax legislation and the further increase to $6,500 was contingent on the passage of legislation related to emissions reductions. This increase in the asset threshold was subsequently unwound from 1 January 2014 and reset to $1,000 until 2015 when the next set of incentives were introduced.

The small business incentive 2015 (Small 2015) increased the asset threshold from $1,000 to $20,000 from 12 May 2015 to 30 June 2017. However, small businesses also received a 1.5 percentage point tax cut from 1 July 2015, so firm behaviour during this period will be affected by both the instant asset write-off and the corporate tax rate cut (see Table 2). We focus mainly on the period up to 31 December 2015 due to the announcement of further ITB in 2016.

The next two policies extended instant write-off benefits to medium-sized businesses.

The expanded business incentive 2016 (Medium 2016) was announced in early 2016. It extended the instant asset write-off to businesses with a turnover of up to $10 million, for expenditure up to $20,000. It came into force from mid-2016. The same package also gave these businesses a tax rate cut from 30 per cent to 27.5 per cent (Table 2).

The medium-sized business incentive 2019 (Medium 2019) extended the instant asset write-off to businesses with a turnover of up to $50 million, allowing them to fully expense capital investments made between 2 April 2019 and 30 June 2020 for assets that cost less than $30,000. However, this policy effectively ended on 11 March 2020 as the Australian Government introduced a new investment incentive that started on 12 March 2020 in response to the COVID-19 pandemic.

The large businesses incentive (COVID 2020) was available from 12 March 2020 to 6 October 2020. Under this policy, larger businesses were given access to a range of new incentive measures. Firstly, businesses with a turnover of up to $500 million were given access to an instant asset writeoff for capital assets costing less than $150,000. The assets covered included past purchases, so it covered assets purchased after 2 April 2019. Second, an accelerated depreciation rate of 50 per cent was available to businesses in the year the asset was purchased for assets costing more than $150,000 purchased in 2019/20 and 2020/21.

Full expensing measures for very large businesses (COVID 2021) were available from 6 October 2020. They allowed businesses with a turnover of up to $5 billion to immediately deduct the full cost of investment without any dollar limit.

It is difficult to measure the impact of these policies on firms' cost of capital. This is because we do not observe the proportion of assets used by each firm that falls below the asset cost cap, nor do we observe the tax life of these assets (with longer-lived assets benefiting more from instant write-off). For example, firms that primarily use inexpensive assets (costing less than the cost cap) with long tax lives would benefit more than firms that use expensive assets (costing more than the cost cap) or firms that use assets with short tax lives. However, we can make some general observations in relation to generosity. The GFC investment tax credit was the most generous of all the policies because asset values were uncapped, and it allowed businesses to ‘double dip’ – they were able to access an extra deduction, as well as normal depreciation allowances in future years. In contrast, all other tax incentives merely allowed a bring-forward of depreciation deductions from future years, with the main benefit being a timing benefit. The COVID 2020 and 2021 policies were the most generous of these bring-forward policies because the asset limits were much higher or uncapped and they covered businesses with much higher turnovers than previous policies. The 2015 and 2016 policies were not only less generous, but were rendered less valuable by corporate tax rate cuts that were implemented at the same time. Lower tax rates imply that each dollar of deduction is worth less in foregone tax.

Footnote

See Appendix A for more details of these policies. [2]