Australia may need to provide tax incentives or change the tax regime for corporate bond issuers if a substantial retail corporate bond market is to develop in this country, according to a Parliamentary committee review.
The House of Representatives Standing Committee on Tax and Revenue has released a report of its inquiry into the development of the Australian corporate bond market, recommending that the government investigate the impact of tax incentives to support the development of the market and adjustments to the taxation system to enhance domestic investment.
Other recommendations included in the report, The Development of the Australian Corporate Bond Market: a Way Forward, include lowering the minimum wholesale market investment parcel to A$1000, reviewing the licensing regime for credit rating agencies and streamlining disclosure requirements.
Australia’s small corporate bond market has been a matter of concern for market participants and policy makers for years. A high proportion of the bonds issued by non-financial Australian corporates are issued in more liquid overseas markets and very little of what is issued locally is available to retail investors.
In 2013, the government passed legislation to allow ASX-listed companies to issue “simple corporate bonds” with streamlined disclosure and issuance rules. The idea was to open up the corporate bond market to retail investors.
These reforms had very limited success, with only a handful of issuers since then. The consensus was that the streamlining did not go far enough, the range of businesses allowed to issue bonds under the scheme was too limited and the types of bonds that could be issued was also limited (no subordinated bonds, for example).
In the latest review, the committee started with the premise that a bigger corporate bond market would provide more businesses with an alternative to bank funding, which would be especially valuable during periods of financial market turmoil, and would give retail investors a new source of high-yield income securities.
On the issue of tax, a number of submissions highlighted the tax bias towards equities and real estate created by tax arrangements such as negative gearing and dividend imputation. Franking credits on bond income could remove that bias.
Other submissions recommended that gains on the sale of bonds should be treated as a concessionally taxed capital gain, rather than the present treatment as income.
The committee did not make specific tax recommendations but called on the government to investigate the impact of increasing tax incentives to support the development of the corporate bond market
A number of submissions called for greater disclosure and transparency in the wholesale market as a way of generating more interest in the market, which the committee endorsed.
One option canvassed in a submissions was to lower the minimum wholesale market investment from $500,000 to allow self-managed superannuation funds, high net worth investors and family offices to get into the market.
The committee recommended that the minimum parcel size be lowered to $1000.
Submissions called for the simplified prospectus rules that apply to simple corporate bonds to be replaced by a term sheet. The committee recommended that the government take further steps to