The Australian Productivity Commission has released an interim report proposing significant reforms to Australia's corporate tax system, including a reduction in the corporate tax rate to 20% for companies with revenue below $1 billion and the introduction of a novel 5% "net cashflow tax" (NCT) for all companies, i.e. increasing the tax burden for companies with revenue above $1 billion.
The reforms are intended to be revenue-neutral in the medium term, with modelling suggesting they could increase business investment by $7.4 billion and GDP by $14.6 billion.
While claimed to be designed to boost investment and economic growth, these proposals raise several complex issues that warrant careful consideration. It is also unclear how an additional tax on large corporates encourages meaningful investment, particularly when the report's conclusions are premised on the analysis that Australia's relatively high tax rates deter investment.
The proposal should not be dismissed lightly. The Commission is clearly enamoured with the NCT saying "[o]ver time, as we learn more about the new net cashflow tax and its impact on business, we should continue to pivot our corporate tax system towards the net cashflow tax and away from the current company income tax."
Public consultation is open until 15 September 2025 and a final report is due in December 2025.
The Proposed Reform Framework
The Commission's proposal involves two key elements:
Corporate Tax rate Reduction:
Lowering the corporate income tax rate from 25% (for companies with revenue of less than $50m) or 30% (for other companies) to 20% for companies with revenue below $1 billion. The 30% rate will be maintained for companies earning over $1 billion.
Net Cashflow Tax Introduction:
1. Background
In 1978 Professor James Meade of the Institute for Fiscal Studies released a report proposing a radical cash flow taxation model to supplant income taxation. The Meade Report's framework has been highly influential in how the Australian Treasury thinks about tax reform, serving as both a reference point and a comparative benchmark, although it has never been fully adopted primarily due to a combination of practical, political, and technical challenges.
The Productivity Commission's model is a cautious, locally adapted embodiment of many principles set out in the Meade Report. The NCT closely aligns with core ideas of immediate expensing, neutrality, and economic-rent focus. However, the Productivity Commission's proposal stops short of a full Meade implementation, instead proposing a hybrid approach with gradual transition, and a moderate rate for the NCT.
2. The NCT
The Productivity Commission's proposed new 5% tax would be applied to all companies based on their net cashflow, allowing immediate deduction of capital expenditure but excluding financial transactions (interest income not included in turnover and interest expense not deductible as an expense).
The revenue included in the calculation would include all sales, including sales of capital assets. Similarly, outflows would take into account expenditure on both revenue and capital items (other than interest).
This tax would allow companies to deduct their full capital expenditure costs for the purposes of the NCT when incurred, rather than depreciating them over time.
The rate is subject to further consultation.
3. Offsetting NCT losses
Losses incurred under the NCT regime can be used to offset liabilities arising from company income tax for the same entity, but only to the extent that the income tax liability is reduced to zero - they cannot be used to create a negative income tax position or generate a refund.
Importantly, losses from the standard company income tax cannot be used to offset NCT liabilities – it is a "one-way" offsetting mechanism. This may result in appeasing 'tax justice' groups by requiring companies with income tax losses derived from intra group interest expense having to pay some amount of tax.
4. No franking credits
Taxes paid under the NCT do not generate franking credits for distribution to shareholders. The proposal highlights that, unlike company income tax, NCT payments are not intended to be credited through the dividend imputation system.
5. Carrying Forward and Uplifting NCT Losses:
NCT losses that are not able to be immediately utilised may be carried forward to future income years. To maintain the real value of these carried-forward losses (and to compensate firms for the delayed ability to offset tax), an "uplift" mechanism is proposed.
The Productivity Commission has suggested using a rate such as the 10-year government bond rate as a representative economy-wide uplift rate, although this parameter remains open for further consultation and may be refined in the final report. This approach would support start-ups and cyclical industries by preserving the value of unused losses for future profitability and removing tax-based disincentives to capital expenditure.
Although the report is silent, it would be reasonable to assume these losses will be subject to continuity of ownership and similar business rules similar to the carry forward of income tax losses.
Outstanding Issues
1 .Treaty Classification Uncertainty:
A critical unresolved issue is whether the proposed NCT would qualify as an "income tax" for the purposes of Australia's extensive network of double taxation agreements. Australian tax treaties typically cover "income tax" and "resource rent tax," but the classification of a cashflow-based tax remains unclear.
Research on destination-based cash flow taxes suggests that such taxes may not fit neatly within existing treaty frameworks, which are designed around traditional income tax concepts.
If the NCT is not considered a "covered tax" under treaties, Australian companies may face:
- double taxation on international transactions;
- inability to claim foreign tax credits; and
- potential withholding tax issues.
2. OECD Pillar Two Global Minimum Tax Interaction
The proposal does not address how the NCT would interact with the OECD's Pillar Two global minimum tax rules, which Australia has implemented. Key concerns include:
- whether NCT payments would qualify as "covered taxes" for Pillar Two calculations;
- how the 15% global minimum tax rate would apply to companies paying both corporate income tax and NCT; and
- potential for unintended top-up tax consequences for multinational groups.
3. GST Revenue and Expense Treatment
The Commission's proposal lacks clarity on whether GST-inclusive amounts would be included in the NCT calculation. Under current Australian accounting standards and income tax calculations, revenues and expenses are generally recognised net of GST. However, stamp duty is generally calculated on the GST inclusive price, and the NCT's focus on "cash flows" could potentially capture GST amounts, leading to:
- complexity in reconciling accounting and tax treatments; and
- potential double taxation of GST amounts.
4. Financial Services Sector Treatment
The Commission explicitly acknowledges that financial institutions require separate consideration for NCT implementation. Instead the Commission suggests the Government consider:
- introducing a financial net cashflow tax that would include financial inflows and outflows in the tax base for firms in the financial services sector; or
- levying additional company income tax: "A simpler approach to raising additional revenue through financial services would be to increase the company income tax rate, equivalent to the net cashflow tax rate, on financial services above the revenue threshold".
5. Transition and Implementation Challenges
The proposal discusses potential phasing options but provides limited detail on transitional rules for existing investments and structures. Some transitional issues (such as the starting balance for capital expenditure) will be considered in the final report.
While the Commission requests feedback on interaction with Australia's dividend imputation system, no definitive framework is provided. This could affect franking credit calculation distribution policies for companies and tax outcomes for shareholders.
Conclusion
While the Productivity Commission's proposals represent the first step towards changing Australia's corporate tax system, numerous issues remain unresolved. The interaction with international tax treaties, OECD global minimum tax rules, and Australia's existing tax architecture requires careful analysis and likely legislative clarification.
If enacted it would require large taxpayers to do at least 3 different calculations each year (income tax, NCT and Pillar 2 effective tax rate), before taking into account the need to consider foreign tax rules in applying Pillar 2 and the hybrid rules. How this would result in an increase in productivity is not addressed in the report.
Given the interim nature of the report and the significant outstanding issues, it will be important to track the Commission's final report (due December 2025) and subsequent government policy responses and engage in consultation to address specific industry concerns.
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