Labor says it will repeal company tax cuts

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.

I’d want to focus on top growth shares like these whatever happens with the tax rate.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.