Taxation, Cost of Capital and Investment in Australian Agriculture*

Abstract

The concept and measurement of the cost of capital is developed to include particularly the role of taxation in investment behaviour. The relative importance of factors influencing investment in plant and machinery is examined for five sectors which make up the broadacre industry of Australia. It is shown that residual funds are important in determining plant and machinery investment, but not through the normally hypothesised channels. It is not the increased liquidity from increased income which raises investment, hut the fall in the cost of capital, which is associated with the marginal rate of tax.The paper further develops the model proposed by Lewis, Hall and Kingston (1986), in which important roles were assigned to residual funds and the cost of capital in determining farm investment in plant and machinery.Here the concept and measurement of cost of capital is developed to include particularly the effect of taxation. The relative importance of factors which influence investment decisions is examined for five sectors which make up the broadacre industry of Australia: wheat, mixed livestockcrops, beef, sheep and sheep-beef. The period of analysis is from 1978 to 1985.Although Australian broadacre properties are generally characterised by the extensive nature of farm operations, there are large differences between the various sectors in the nature and function of capital assets. Different inputs are required for different enterprises. As well, economic and physical depreciation rates vary among items of capital equipment. Thus, depending upon the particular asset and the specificity of that asset to particular broadacre industries, the pattern of investment will vary across the sectors. Investment patterns might further be modified by perceptions of risk within particular sectors. In short, in the analysis of investment behaviour within the broadacre industry there is a case for treating the sectors as separate entities.In the present study of farm investment, attention has been concentrated on the acquisition of capital assets which originate from the non-farm sector -that is, plant and machinery. The main reason for this is to focus on what is seen as a particularly important component of investment. This is because plant and machinery investment provides a powerful link between the farm sector and the rest of the economy.Much investment work in Australia has concentrated on testing the 'residual funds' hypothesis of Campbell (1958), who argued that funds generated on-farm were of major importance in the formation of capital.

Exploring the decision making of Dutch dairy farmers under policy uncertainty

“…Our results suggest that experts expect a positive impact of earning capacity on the likelihood of farmers to invest, a finding that is in line with the effect of earning capacity on investments in Dutch greenhouse horticulture (Oude Lansink et al, 2001). Lewis et al (1988) found a similar result for the impact of earning capacity, defined by the cost of capital, on investments in plant and machinery by Australian farmers. Furthermore, found that Dutch dairy farms with higher external finance are less likely to invest.…”

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