Productivity Commission recommendations - Reduce corporate income tax to 20 per cent plus 5 per cent net cashflow tax

On 31 July 2025, the Federal Treasurer released an interim report by the Australian Government Productivity Commission (PC), as part of the Government’s mandated inquiry into ‘creating a more dynamic and resilient economy’. In the corporate tax sphere, the PC has outlined the following draft recommendations:

Lowering the headline company income tax (CIT) rate to 20 per cent for companies with turnover below $1 billion, with the 30 per cent CIT rate remaining for companies with turnover above $1 billion
The introduction of a net cashflow tax (NCT) of 5 per cent to be applied to the excess cashflow for all companies (both above and below $1 billion turnover), which is intended to encourage increased capital investment.

Corporate tax reform to spur business investment

The PC’s main aim of the proposed corporate tax reform is to improve business investment and Australia’s lacklustre productivity and growth, and to encourage a more dynamic and resilient economy. To achieve this, Australia needs to reduce our reliance on the existing CIT system and transition to a new system that supports capital expenditure more effectively.

Reduction of corporate tax rate

The PC proposes reducing the statutory rate to 20 per cent for all companies below a threshold of $1 billion of revenue (being the bulk of all companies), with the 30 per cent CIT rate remaining for companies above the threshold (just over 500 very large companies). The PC indicated that over time, the threshold can be raised or removed, or the rates adjusted.

There are several rationales for the reduction of the CIT rate. These include:

Increased viability of capital financing and expenditure decisions in Australia.
Encourage Australians to take risks to establish new companies and grow existing ones. It would also encourage established foreign companies to enter Australian markets, challenge incumbents, increase competition, and bolster dynamism and productivity.
Current CIT is inefficient, with a relatively high economic loss compared to government revenue raised (marginal excess burden) relative to other taxes in Australia.
The proposed CIT rate of 20 per cent would be close to the OECD average, which is around 21 per cent, making investments in Australia more internationally competitive.

Net cashflow tax on all companies at 5 per cent

While the PC’s initial proposal is for a 5 per cent net cashflow rate, the precise rate should be determined through further consultation and modelling. It may increase over time and could grow as a proportion of the revenue base.

Characteristics of cashflow tax

The proposed NCT should have the following design characteristics:

Defining sales - All sales of goods and services would be recognised as turnover. Unlike the CIT, there would be no distinction between capital and revenue items in the calculation of turnover.
Defining expenses - All purchases would be recognised as expenses within the year of the expenditure, with no distinction between revenue and capital expenses e.g. fully written-off depreciable items, and land and buildings in the year of the expense.
Financial transactions - For simplicity purposes, financial transactions would be excluded from sales and expenses. The key implication is that interest earnings would not be recognised as turnover, nor interest payments as expenses. Dividends paid are also not included as an expense. The treatment of dividends received is not mentioned in the PC interim report, but it is assumed they would also be excluded from revenue.
Loss treatment - Any loss a company reports under the NCT should be able to be offset against its CIT liability down to zero and any excess would be carried forward and indexed to account for inflation.
Dividend imputation - The interaction of the NCT and the dividend imputation system is yet to be developed. The NCT could be treated either in the same way as the CIT by having imputation credits calculated on all tax paid, or it could be treated as a final tax and not count against imputation credits or withholding taxes.

Rationales for NCT

There are several rationales for the NCT. These include:

A NCT would tend to tax normal investment returns less heavily than the CIT as it would allow companies to deduct the full value of their capital expenditure in the year it is made, rather than incrementally through depreciation.
While the NCT would raise the total tax burden for some large companies (particularly those not undertaking new investment), most companies would pay less tax, and overall, the NCT would incentivise new capital expenditure across the economy.
Losses would be uplifted for inflation when offset against future tax liabilities, which would increase companies’ incentives to take risks, and over time would increase their willingness to enter new markets and grow their businesses.
The cost of financing investments (whether in the form of interest payments or dividend payouts) would not be deductible under the NCT, in contrast with the CIT, which allows interest payments but not dividends to be deducted. Removing the deductibility of interest under the NCT would reduce the tax system’s bias towards debt. This could help newer and growing firms who tend to rely more on equity financing, to compete with larger incumbents.

Next steps

The PC states that between the release of this interim report and the final report in December 2025, it will undertake further analysis using dynamic models as well as further engagement with literature, stakeholder feedback and consultation on the proposals, and other suggested corporate tax reforms. The PC invites feedback and further information from individuals, businesses and organisations, with submissions due by 16 September 2025. BDO is considering lodging a submission.

BDO comment

BDO sees some merit in the aims that the PC has outlined in its interim report and, if implemented appropriately, could assist in creating a more dynamic and resilient economy. However, if not implemented appropriately, it has the potential of increasing the complexity of Australia’s already highly complex corporate tax system. If the Federal Government decides to implement the 5 per cent NCT proposal, it needs to fit smoothly into the existing CIT calculation, reporting and payment systems.

There also needs to be a full review of the implications on the rest of the CIT regime to ensure it does not cause unintended consequences. There should also be consideration of whether its introduction could mean a reduction to some of the more complex integrity provisions in the CIT regime.

Contact your local BDO adviser from our corporate and international tax team if you would like further information.