Company tax cuts, regulatory pare backs proposed in Productivity Commission report

The Productivity Commission's interim report for one of its five inquiries, ‘Creating a more dynamic and resilient economy,’ recommended that the corporate tax rate should be cut to 20 per cent, and regulation should be pared back.

“If we don’t get our economy moving again, today’s children could be the first generation to not be better off than their parents. We need to spark growth through investment and competition – the best way to do that is to fix our company tax system,” deputy chair of the Productivity Commissiob, said.

“Our proposed reforms will begin to shift the company tax system towards one that better supports investment and productivity growth.”

Productivity has been a hot topic recently for policymakers following a decade of stagnation. The commission said that boosting productivity back to Australia’s historical average could see the typical worker earning $14,000 more annually.

The commission has been tasked with conducting five inquiries to investigate ways to boost productivity in Australia, ahead of the Albanese government’s economic roundtable, which sought to inform economic reform policy going forward.

To boost corporate investments, the Productivity Commission recommended that the company tax rate be cut to 20 per cent for businesses with revenue under $1 billion, which would capture the majority of Australian businesses.

This would see Australia’s corporate tax rate align more closely with the OECD average of 21 per cent, it said.

It said this tax cut should be coupled with a new 5 per cent net cash flow tax. This would apply an additional tax of 5 per cent to company profits, but enable companies to deduct capital expenditure costs, which would boost corporate investments.

“The net cashflow tax, which would apply to all companies, is specifically designed to allow firms to immediately deduct capital expenditure in the year in which it is incurred, thereby encouraging investment,” Robson wrote for The Australian Financial Review.

“Even with this new cashflow tax, most companies would pay less tax than they do now. Those with a turnover greater than $1 billion might pay more, but they can mitigate this by investing back into the economy.”

The Productivity Commission estimated that these combined corporate tax reforms could boost investments by $8 billion while being revenue-neutral over the medium term.

However, CA ANZ called for more clarity on the 5 per cent net cash flow tax, saying a lack of detail made it hard to evaluate the proposal properly.

“We want to know more about the impact of the proposed additional 5% cash flow tax,” chief executive Ainslie van Onselen said.

“This new tax proposal is unclear on some fundamental issues such as whether cash flow tax will generate franking credits and whether foreign jurisdictions will recognise cash flow tax to prevent double taxation.

The interim report also called for regulatory pare-backs after their consultations unearthed widespread concern amongst businesses regarding their growing regulatory burdens.

“Regulation is important, but over-regulation is a handbrake on growth. The Government needs to cut through the thickets of regulation that are slowing us down and ensure any new regulations are made with growth in mind,” Barry Sterland, commissioner of the Productivity Commission, said.

RSM Australia economist Devika Shivadekar said that the PC’s proposed reforms tackled two of the most common challenges facing clients: rising operating costs and heavy regulatory burdens.

“Lower company taxes will support businesses to invest back into new equipment, staff training or expanding operations and drive business growth. While reducing red tape frees up time and energy for businesses to focus more on customers, innovation and getting the job done,” she said.

“We know that when the tax and regulatory burden is lighter, businesses are more willing to try new ideas, invest in technology or enter new markets – all which are key in lifting productivity.”