Productivity Commission calls for corporate tax and regulatory overhaul

These reforms aim to help Australia “make the most of new technology, boost investment and ensure regulation strikes the right balance between benefits and trade-offs”.

Among the recommendations is a call to urgently reform Australia’s corporate tax and regulatory systems.

A hybrid corporate tax system to promote investment

At the heart of the PC’s recommendations is a shift to a hybrid corporate tax system, a recommendation to reduce company income tax for all companies and introduce a net cash flow tax.

Under the proposed model, the statutory company tax rate would fall to 20 per cent for businesses with revenue under $1 billion and 28 per cent for larger firms, complemented by a 5 per cent net cash flow tax applied across all companies.

The proposal is designed to encourage investment in productive capital by reducing the tax burden on normal returns, the minimum returns businesses require to invest.

According to the PC, the reduction of company income tax rates would be partly funded by “increased tax receipts due to economic growth” and partly by the net cash flow tax.

Modelling suggests the reforms could increase private investment by $10 billion (2.2 per cent), lift GDP by $13 billion (0.5 per cent), and improve labour productivity by 0.5 per cent, all while remaining broadly revenue-neutral in the long term.

However, the proposed 5 per cent net cash flow tax had faced criticism from stakeholders during consultation, with several stakeholders – including the Mortgage and Finance Association of Australia (MFAA) – saying that it would increase compliance costs for small businesses that already operate with limited resources and create additional complexity for businesses, particularly smaller firms.

Concerns were also raised about distortions between small and large firms, as well as the impact on foreign investment, since the additional tax might make Australia less competitive relative to other jurisdictions.

Some submissions suggested that simpler reforms – such as straight corporate tax rate cuts or partial expensing of capital – would be easier to implement and understand.

Nevertheless, the PC has maintained that the cash flow tax remains the best revenue-neutral option to encourage investment, while allowing firms to fully deduct their investment costs.

It said that smaller firms stand to benefit the most from the proposed rate reductions, enabling them to expand and compete more effectively against larger, established incumbents.

However, the commission also outlined that other corporate tax options could be explored if net cash flow tax was considered to be too complex, such as a marginal allowance for corporate equity or reductions in the company income tax rate.

The PC stressed that encouraging these firms to grow is critical for injecting dynamism into the economy and driving productivity improvements.

PC deputy chair Dr Alex Robson commented: “Reforming our company tax system and reducing the burden of regulation are two of the best ways to inject more dynamism and investment into our economy.

“Having modelled and refined this proposal further since our interim report, we are confident it is the best revenue-neutral option for improving investment.

“We have also modelled and explored alternative corporate tax reforms that would boost investment but come at a cost to the budget if not paired with other revenue measures.”

Regulatory reform to reduce barriers and costs

Alongside tax changes, the reports emphasise that Australia’s regulatory environment is a major constraint on business growth. Overly complex and time-consuming regulations slow project approvals, increase compliance costs, and discourage firms from entering or scaling in certain markets.

Indeed, the commission heard examples from the MFAA that showcased the lack of harmonisation of payroll tax and verification of identity rules, signing and service requirements (specifically the requirement for paper-based notices), comparison rates for mortgages not being fit for purpose, and discharge processes causing regulatory delays.

The report flagged that regulatory barriers were generally delaying investment and discouraging entrepreneurship.

To address these challenges, the commission is recommending:

• A $10 billion reduction in regulatory burden by 2030, supported by an annual regulatory review.

• A whole-of-government statement on regulation, making regulatory reform a core priority.

• Strengthened scrutiny of new and existing regulations, including cabinet-level review, parliamentary oversight, and the appointment of an independent statutory commissioner for impact analysis.

• Mandatory post-implementation reviews where the effects of policy changes are highly uncertain.

• These measures aim to create a regulatory environment that better balances growth, competition, and innovation with policy objectives.

• By reducing delays and costs, the reforms would support faster decision making and encourage firms to invest in productive activity, the report said.

“Poorly designed or implemented regulation is a handbrake on growth. We need regulatory policy that better balances the benefits and trade-offs when considering new regulation,” said Robson.

Broader productivity reforms

While corporate tax and regulatory changes are central, the five inquiries also cover reforms across workforce skills, innovation, care services, and energy.

• Building a skilled and adaptable workforce: Recommendations include improving access to high-quality teaching resources, smoothing pathways to upskilling, and reducing excessive occupational entry barriers. The goal is to ensure that workers can move into new roles efficiently, supporting growth and productivity.
  

• Harnessing data and digital technologies: The commission highlights the importance of innovation as a driver of productivity growth. Recommendations focus on AI regulation, improving access to and sharing of data, and supporting the adoption of new technologies that could deliver a $116 billion productivity opportunity over the next decade.
  

• Delivering quality care more efficiently: Investment in prevention and early intervention in the health and care sectors is recommended to improve outcomes and reduce long-term costs. For example, a proposed National Prevention Investment Framework would invest $1.5 billion over five years, returning an estimated $2.7 billion in savings over 10 years.

• Investing in cheaper, cleaner energy and the net zero transformation: Recommendations include a national emissions-reduction policy for the electricity sector and a technology-neutral approach to new generation and storage infrastructure. This could save the economy around $8 billion over 15 years without compromising state renewable energy targets.

‘Average worker would be 14k a year better off by 2035’

Taken together, the PC said its 47 recommendations would restore dynamism, encourage investment, and strengthen economic resilience.

The PC suggested that the average full-time worker would be at least $14,000 a year better off by 2035.

Speaking following the release of the reports on Friday (19 December), Productivity Commission chair Danielle Wood said: “Australia’s productivity growth has stalled since 2016. We need to get productivity moving to ensure future generations can live better and more prosperous lives than those that came before them.

“Our final suite of recommendations, if fully implemented, would add billions to the economy, benefiting workers, households and businesses today and into the future.

“No single policy reform can bring productivity growth back to its long-term average – governments will have to make a lot of pro-productivity decisions that support and reinforce each other.”

[Related: Corporate tax cuts backed by Productivity Commission]