A former senior policy economist argues Labor’s proposed capital gains tax inflation indexation, layered on top of the 30% corporate tax rate, sharply lifts the integrated tax on retained earnings. Under the model, profits kept inside companies and reflected in higher share prices would face more tax when investors eventually sell compared with today’s settings. That extra burden lands hardest on shareholders who rely on capital gains rather than fully franked dividends.
Retained earnings are a primary funding source for growth-focused companies that reinvest instead of paying out cash. Fund managers warn that a higher tax hit on these retained profits pushes boards to favour larger dividend payouts over reinvestment. The shift effectively rewards established cash-rich businesses and disadvantages younger or expanding firms that need to keep profits in-house to scale. Investors also hear that the combined corporate and personal tax rate on these reinvested profits would be among the highest globally, at more than 50%.
Policy specialists say the change risks deepening existing structural weaknesses in Australia’s economy. The country already struggles with low productivity growth and limited competition in several concentrated industries. A tax system that encourages distributions over reinvestment favours incumbents and discourages new entrants that rely on retained capital to build scale. Australia then looks less attractive as a place to base operations and raise equity, which is where growth-oriented companies need supportive settings most.
