Company tax reform for a more productive Australia

7 January 2026 | Alex Robson

Santa may be able to deliver gifts for free, but governments can’t. While most economists and business leaders would agree our company tax system is due for reform, the question of how, and how to pay for it, evokes fierce debate.

In July, my colleagues and I at the Productivity Commission released a draft proposal for a hybrid corporate tax system, with a cut to the tax rate for all but the very largest companies partially funded by a net cashflow tax (NCT). In effect this would shift the balance between what companies pay, giving all Australians the gift of higher productivity, investment and GDP.

We have now further modelled and refined this proposal and handed it to the government as part of our five inquiry reports into increasing Australia’s productivity. The final proposal retains the NCT but lowers the statutory company tax rate for all companies (not just small and medium ones) – to 20% for companies with revenue below a $1 billion threshold, and to 28% for companies with revenue above $1 billion. 

We’re confident that this revised proposal is the best revenue-neutral option for improving dynamism and investment. Modelling indicates that it would increase investment by $10 billion (2.2%), labour productivity by 0.5% and GDP by $13 billion (0.7%). 

Almost every firm would pay less tax under this proposal. A company earning less than $1 billion would see its effective tax rate fall to between 19% and 24%, down from 25% for the small and 30% for medium size companies under the current system. For the largest firms, depending on their investment activities, the effective tax rate would range from 26.7% up to 31.6%.

Our modelling also shows that some alternative reforms could have a similar or greater impact on investment – though these come at cost to the budget and would have to be part of a broader package.

Going with the cash flow

In our interim report, we showed how a lack of dynamism and investment was holding back Australia’s economy. We found that since the Global Financial Crisis, non-mining investment has declined by around three percentage points as a share of GDP. 

We proposed a reform package that reduced the distortions in our current company tax system, particularly the relatively high tax rate applied to the minimum return required to invest in competitive industries – so called ‘normal rates of return’.

To partly fund a reduction in company income tax, we proposed a net cashflow tax, which would in itself address some of the issues inherent to Australia’s corporate tax system. 

The net cashflow tax has four key features: the ability to immediately expense capital; broadening the capital base to include all types of capital; symmetric treatment of debt and equity financing; and the carry-forward and uplift of losses. The design of the NCT takes lessons from other tried and tested cashflow taxes which have been applied across the globe – from Norway to Estonia and from Mexico through to Poland.

More bang (but for more bucks)

Fiscally responsible tax reform inherently requires trade-offs. This would be in the form of an additional tax or higher rates, or offsetting rises in other taxes or cuts in spending. 

We were happy to see the wider discussion about tax reform packages which our inquiry has spurred, and we assessed several revenue-negative ideas as worthy of further exploration. 

To compare these alternatives, we modelled (without recommending) a long term annual reduction in corporate taxation of around $7 billion, offset by tax increases elsewhere. If you change the tax base in different ways, the positive impacts on investment, productivity and GDP are roughly double those of our recommended proposal. However, it’s worth reminding ourselves that our proposal comes at no net cost to the budget.

One simple alternative would be to retain the 5% net cashflow tax but cut the tax rate to 20% for all companies.

A second approach is to keep tax rates the same as they are now but change the tax base via an immediate partial expensing model. Full expensing, while popular, comes at a cost to the budget of around $68 billion per year.

The partial approach embeds the four key features of the net cashflow tax, but does so within the existing company income tax system. That means that while it reduces the tax rate on normal returns, it would have fewer new administrative requirements. 

In our modelled case, we assumed that companies could immediately expense one third of new investment, with proportionate changes to other elements, including a 33% reduction in the interest deduction, and some carry-forward of losses. 

In other words, under this alternative proposal, one third of the current tax system would shift towards an NCT-like system, with the remaining two thirds unchanged. 

A third option is an allowance for corporate equity (ACE) on new equity. 

By allowing a deduction for the cost of equity within the current company tax system, an ACE reduces the extent to which normal returns are taxed. But applying an ACE to all existing equity comes at substantial fiscal cost (think $38 billion in budget costs per year) while providing significant windfall gains to companies. 

A ‘marginal’ or ‘soft’ ACE – where the ACE is only applied to new equity – is an alternative that can be funded within a $7 billion envelope, when the allowance rate is set at 2.5%. If a range of integrity and implementation issues can be addressed, this also yields similar economic outcomes. 

Finally, for completeness, we modelled a simple cut to the company tax rate to 25% for all companies. This is different from base changes and, at a long-term fiscal cost of around $7 billion, the economic benefits are around half the gains from different base change options. A rate change has few additional positive impacts compared to our recommended proposal because it does not as tightly target the distortions within the current corporate tax system. 

We are hopeful that our work is just the beginning of the tax reform debate. We think our hybrid tax proposal is the government’s best option. But there are now several other options on (depending on broader fiscal considerations) that others may want to place on their reform wish lists this Christmas.