The Turnbull government currently is trying to pass legislation to reduce the company tax rate for all companies, including the biggest ones in the country, from 30% to an eventual 25%.
Many government and business figures have said that this is an important step to maintain, or increase, Australia's international competitiveness. Most other countries have a lower tax rate.
The Australian Labor Party has announced today that it will reverse the company tax cuts if they are passed and if Labor are elected, according to a report from Fairfax Media Limited (ASX: FXJ). Labor say that this measure will save $35 billion over a decade.
This debate over the company tax rate is further complicated by the franking credit discussion. Australia does have a very high corporate tax rate, but it's mitigated by the fact that franking credits offset the tax when the money arrives into the individual's hands through dividends. It is overseas-based companies and shareholders that lose the most from Australia's high corporate tax rate.
The AFR revealed a secret poll of business leaders from the Business Council of Australia, it asked chief executives what they would do with the company tax cuts. The options were: returning funds to shareholders, more investment, increasing the wages of their existing workforce or increasing employment. Apparently more than four fifths of the replies were for the first two options.
This is a big deal for Australian shareholders and companies because it could boost the net profit after tax (NPAT) and earnings per share (EPS) statistics quite significantly. If a company's effective tax rate is 30% then it would have $70 net profit after tax if it earned $100 net profit before tax. Reducing the tax rate to 25% would leave the company with $75 left. The NPAT increase to $75 from $70 would represent a 7.14% profit increase, so clearly there is a sizeable gain at stake. Arguably, the stock market could go up by up to 7.14% due to the EPS increase.
It could be good news for companies like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) that pay a lot of tax.
Foolish takeaway
Ultimately, investors shouldn't change their investments based on minor tax changes. The underlying investment is key. If you just focus on quality growth companies then your portfolio should do very well over time.
