New US Tax Proposal Poses Existential Threat to Australian Superannuation Funds
How would you like it if your superannuation fund started to pay tax on your investments to the United States Government?
It might seem like a far-fetched idea but under one of the provisions of US President Donald Trump’s so-called “big, beautiful bill” Australian companies, investors and super funds could possibly be hit right where it hurts.
Already the mega bill has passed the US House of Representatives and is now being reviewed in the Senate, with many executives from some of the world’s biggest companies now lobbying hard against the plan to raise taxes on foreign investments in the US, saying that it would hit many millions of American jobs.
Australia on the naughty list
The aim of section 899 of the bill is to impose additional taxes on companies and investors from countries that it deems to have punitive tax policies.
Somewhat surprisingly, Australia features on the list of countries that have such tax policies, courtesy of our so-called Google tax passed in 2015, which aimed to make technology companies pay tax on their Australian profits, and also our diverted profits tax aimed at multinationals.
Australia’s stance of supporting the OECD’s move towards establishing a minimum 15% tax on multinational earnings also apparently put Australia on the naughty list, along with many European countries.
The tax promises to be a hefty one as well, starting at 5% on all dividends and company bond interest payments, and rising to 20% over four years.
Tax could be quite hefty
Such a tax would be an astonishing cost placed on the big Australian superannuation funds which already have $400 billion invested in the US on behalf of their members and are looking to add to that position greatly over time.
The tax would also apply to any American portfolio holdings of sovereign wealth funds, potentially hitting Australia’s Future Fund.
It can also apply to foreign governments, bringing their investments in the US into the firing line for the first time.
Unsurprisingly as the host of the world’s biggest capital markets, the US is also the world’s biggest destination for foreign investment.
Foreign investors own about 20% of all US equity and bond securities and the US attracts about 26% of global foreign direct investment.
New and existing US investments could be hit
The interesting thing about Section 899 is that it would not only deter new US investments, but it could also trigger an exodus of existing capital and put more pressure on the US dollar.
Already, the US dollar has fallen around 10% this year, and the interest rates on longer-duration Treasury bonds have risen – both the opposite of the normal reaction to turbulence and uncertainty when capital flows towards the US.
However, it could be a sign of things to come if the new tax is passed as Australian and other investors reconsider their current US investments and fresh investments as well.
It is also quite a bold move when you consider that the US is a big debtor nation that needs foreign capital inflows to fund its large and rapidly growing government deficits and debt.
It is not too hard to foresee a result of this tax being more US dollar weakness and higher bond yields and in the longer term, a move towards other European and Asian investment markets in preference to the US and its higher taxes.
Perhaps ironically, this potential hit on Australian investments in the US could also deliver other unintended side effects that could hit America quite hard.
Apart from funding America’s huge foreign debt load, which it is adding to daily due to deficit spending, another side effect could be the impact on millions of jobs within America that are provided by big foreign multinationals, many housed in countries this revenge tax is aimed at, including much of Europe and Asia.
Big global companies fighting the new tax
An alliance of more than 200 large global companies, which have operations in the US, including Shell, Toyota, SAP and LVMH, has been pointing out that together they provide 8.4 million jobs in America – a total that may need to be cut should this tax be introduced.
They are also pointing out that there could be a significant drop in corporate investment and a retreat from US assets if the new tax is implemented.
The most dramatic of these could be any cut in the purchase of US Treasury Bonds by foreign investors, given that the US bond market is already shaky and that Treasury Bond auctions have required higher yields to attract foreign buyers.
Higher bond yields already boosting debt repayments
Already, yields on long-term global debt have soared in recent weeks as concern over spiralling debt and deficits led some investors to shun the securities and prompted others to demand a higher premium for the risk of lending to governments.
US 30-year yields touched a near two-decade high of 5.15% in May, and even at around 4.94% now, they are well above levels seen as recently as March.
Higher yields also mean more funding pressure at a time when the US is borrowing more and government spending remains rampant with the big, beautiful bill itself forecast to add trillions to US budget deficits in the years ahead.
The Congressional Budget Office estimated the bill would add US$2.4 trillion to the US debt by 2034, and that includes the revenue expected to be scooped up by this new tax on foreign investors.