Bringing Growth to London: Lessons from Australia

Let's not be too proud to change

Good Morning Team.

I wanted to take a few moments of your time to consider why Australia is objectively better for small caps than the UK. And arguably, better for large caps as well.

I also want to ponder whether we could perhaps adopt many of their common sense rules, regulations and tax policies in order to boost growth and liquidity.

Having covered many of the larger names for IG Australia over the years, and taken enough 5am exams to kill a crocodile (time difference), it’s time to consider some of what I think works.

*This newsletter has no affiliation with IG Index*

Just don’t mention Havieron - that was ‘their one!’ Don’t worry you Ockers, it’s on its way!

Here’s the lowdown.

Personal Taxation

Australia actually wants its own companies to succeed, and the key way it does this is through the imputation system (better known as dividend franking credits).

We had a version of this until 2016 (dividend tax credits), which effectively meant that basic rate taxpayers paid no dividend tax, and higher and additional ratepayers enjoyed lower dividend tax. This was changed for a £5,000 dividend allowance which has since been cut by 90% to £500, while the dividend tax has steadily increased.

I wonder why we can’t get any productivity? Sigh. Torsten Bell and his brother have the keys now, so expect the ISA and SIPP to be curtailed severely soon.

Anyway, Australia allows companies to attach franking credits to dividends, which domestic investors can use to offset personal tax liabilities. This eliminates double taxation on dividends and makes high-dividend-paying small cap (or large cap) companies more attractive to Australian investors.

Here’s your example:

Let’s say the lithium market has picked up and Pilbara Minerals has generated a profit of AU$10 million, paid corporation tax at the prevailing rate for larger companies at 30% (AU$3 million), and then declared a dividend of AU$7 million.

Happy days.

PLS shareholders get a dividend of AU$0.70 per share, fully franked. Each shareholder gets a franking credit equal to the corporation tax paid on their portion.

This means that for every AU$0.70 dividend per share, they get AU$0.30 in credits, which they can use to offset against their personal tax liability.

This effectively means that for most Australians, dividend tax is either non-existent or very low, as long as they are invested in companies paying corporation tax to the country.

It also has the effect of forcing companies operating in Australia to pay corporation tax in Australia, because otherwise investors will choose alternatives who do, out of their own self-interest.

I’m also a big fan of Australia’s pension system in general, but that’s beyond the scope of this analysis.

Corporate Expenses

Shout-out (whether wanted or not :)) to Alex Stella, MD at Investor Hub who recently highlighted the cost difference between London and Sydney on LinkedIn.

(I know Canberra is the capital, but Sydney is where the ASX lives).

A direct quote:

‘If you are a public company on the main market of the LSE wanting to issue £50,000 in shares as payment for services or to raise capital, the exchange would charge you a minimum fee of £15,770 + VAT. That is a lot of money...

For comparison, if you were a public company on the ASX wanting to issue the equivalent of £50,000 in shares, the exchange would charge you ~£800.’

Just throw that in your head and roll it around for a while. Small caps pay in shares all the time, because it means they can conserve cash, and contractors who believe in the company can take a small stake in their potential success.

Beyond this, AUS companies conducting eligible research and development can access a non-refundable tax offset of up to 38.5% for larger companies and a refundable tax offset of up to 43.5% for smaller entities with an annual turnover below AU$20 million.

Let’s say we have a new gold producer trying out some snazzy new ore sorting tech.

Let’s call them GoldMoon PLC. They generate a net taxable income of AU$10 million, and pay a corporation tax rate of 25%, or AU$2.5 million (they have turnover under AU$50 million so qualify for the smaller CT).

They get a 43.5% offset from their corporation tax, equivalent to 43.5% of AU$2.5 million, or AU$1,087,500, which reduces their total corporation tax bill by almost half.

Combine this with the franking credits, and you can see why there’s a thousand explorer/producers down under.

Then instead of our miserly BADR of a max £1 million (down from £10 million when it was entrepreneur’s relief), Aussies benefit from 50% CGT reduction when selling business assets, and a 100% reduction if assets have been owned for 15 years and the owner is retiring.

But let’s say you’re just an exploring minnow.

They’ve got the Exploration Development Incentive.

Let’s say GoldMoon PLC spends AU$1 million on exploration activities, and therefore incurs a loss of AU$1 million.

Let’s say you’re a HNW and you own 5% of GoldMoon.

The tax benefit of that loss for all shareholders would be AU$250,000 (let’s again assume the 25% corporation tax rate). As you own 5% of the company, you get a tax benefit worth 5% of AU$250,000, or AU$12,500, which you can offset against your own, personal taxable income.

Then there’s all sorts of grants, like the Exploration Incentive Scheme (Alien Metals was recently awarded a grant, despite lacking an ASX listing - one coming?) And there’s similar schemes for clean energy, biotechs and all the other risky ventures struggling for capital in the UK.

Want to market internationally? Get costs reimbursed through Export Market Development Grants. Need help with developing tech? Apply for an Accelerating Commercialization Grant, which provides matched funding of up to AU$1 million to support bringing innovative products to market.

Market Rules

Want to raise capital through a placing? Sorry, you gotta suspend trading first. Aussies don’t want anyone shorting your stock into oblivion while you sort out the bottom line.

And if you want to raise capital in Australia, they will usually go to existing shareholders as a first port of call through a non-renounceable entitlement offer - or in other words, existing shareholders are offered the chance to take part in a discounted placing ahead of other market participants.

This generally means less volatility. And you know what? It’s also just fairer.

Lie to the market? They will punish you.

But I think the biggest thing is the culture. It’s hard to put into objective words, but in addition to lower barriers to entry (lower listing fees and less stringent financial requirements), the ASX just has a big focus on growth potential.

When a company launches an IPO, the entire investing community gets behind it, and wishes them success.

The opposite is sometimes sadly true in the UK.

The bottom line

If you want a healthy stock exchange, liquidity and growth, then look at who’s making that happen and copy their homework.

The Australian system is very cleverly designed to support explorers in their initial stages, to get them to keep developing their mines with new tech, to pay out dividends and to keep exploring.

We’re lagging behind.

To anyone with the power to effect change: We need to explore adopting similar tax policies and corporate expense rules to foster growth in the UK market.

We can literally copy their homework.