Depreciation Provisions and Investment Incentives under Full Imputation

Abstract

This paper examines how the Australian full imputation and capital gains tax provisions can combine to influence incentives to invest by affecting the cost of capital. Costs of capital for both unincorporated enterprises and widely held, Australian‐owned companies are examined under idealized depreciation provisions. The paper also presents numerical estimates of costs of capital under actual Australian depreciation provisions.

A Measure of the Efficacy of the Australian Imputation Tax System*

“…3 See Australian Financial System Inquiry (1981), Cheok (1981), Review of Business Taxation (1999a,b) and Department of the Treasury, Australian Government (2002). 4 For a discussion of various tax-induced biases that exist under the Australian imputation tax system, see, for example, Officer (1981), Finn (1981), Howard and Brown (1992), Benge (1997Benge ( , 1998Benge ( , 2001 and Review of Business Taxation (1999a). 5 In considering the effect of Australian taxes, including DWT, on the final after-tax return to nonresident investors, the Review of Business Taxation (1998, p. 176) suggests 'it is notoriously difficult to determine the true value to non-residents of credits which may be available to them in their home jurisdictions for taxes ... paid in Australia'.…”

“…4 4 For a discussion of various tax‐induced biases that exist under the Australian imputation tax system, see, for example, Officer (1981), Finn (1981), Howard and Brown (1992), Benge (1997, 1998, 2001) and Review of Business Taxation (1999a). …”

Corporate Financial Policy Biases and the Ralph Reforms

“…Estimates of accrual-equivalent rates of capital gains tax are as in Benge (1998). It is assumed as in King (1977) that a fraction, a, of shares are sold each year.…”

“…In practice, there will always be some possibility of each of these three eventualities. In estimating the gains from perturbations in ®nancial policy under the former capital gains tax provisions, it is assumed as in Benge (1998) that the probabilities of real gains, real losses but nominal gains, and nominal losses are 0.6, 0.1 and 0.3 respectively. The ®gures reported are a weighted average of these three cases.…”

“…Shareholders on higher marginal rates will have arti®cial incentives to invest in companies to shelter their income from higher rates of personal tax. There will also be important effects on incentives to invest as is discussed further in Benge (1998).…”